Selling versus surrendering

Check these four first

All of them keep some coverage in place, which selling and surrendering do not.

• Reduced paid-up — convert to a smaller amount of permanent coverage with no further premiums
• Extended term — use the cash value to keep the current death benefit for a defined period
• An accelerated death benefit rider, if you have a qualifying diagnosis
• Reducing the death benefit, or borrowing against cash value, to make the policy affordable again

How a settlement works

A buyer purchases the policy, becomes owner and beneficiary, pays the remaining premiums and collects the death benefit. You receive a lump sum, generally more than the cash surrender value and less than the death benefit.

Pricing turns on your age, health and the policy's cost of insurance — which means the process requires disclosing medical information to buyers.

What it costs you

• Your beneficiaries receive nothing from that policy
• Buyers and brokers take fees and commissions out of the transaction
• Proceeds can be taxable in part — take advice before, not after
• A lump sum can affect eligibility for means-tested benefits such as Medicaid
• You can't undo it

Doing it properly if you proceed

• Most states regulate life settlements and license providers and brokers — verify licensing with your state insurance department
• Get multiple offers rather than accepting the first
• Ask in writing what commissions and fees are being taken and by whom
• Get the tax treatment confirmed by a tax professional for your situation
• Check the effect on any means-tested benefits before accepting
• Have someone you trust review the paperwork

If you are terminally or chronically ill

A viatical settlement is the version for people with a serious diagnosis, and it has its own tax treatment — payments may be excludable from income in defined circumstances.

Check first whether your existing policy has an accelerated death benefit rider. Using a rider you already own is generally better than selling the policy.

When surrender is simply the right answer

For a small policy, where the settlement market wouldn't be interested and the alternatives don't help, surrendering is straightforward.

Before you do, ask for the cash surrender value in writing and check for outstanding loans — surrendering with a large loan can produce a taxable gain on money you spent years ago.