How Much Tax Do You Pay on a Life Insurance Payout?

Can you cash out a whole life insurance policy? Yes, you can sell all or a portion of a life insurance policy, even term insurance.

(3 minute read)

If you are looking to rid yourself of a burdensome life insurance policy, selling your life insurance policy via a life settlement is likely the most beneficial option. Although choosing to surrender a life insurance policy for cash value is an option, you will always receive a greater payout from a life settlement. 

Additionally, working with an experienced life settlement advisor will give you the best chance for a profitable taxable gains on your life insurance policy—this is the exact dollar amount you will receive after selling your life insurance policy. However, before committing to a life settlement, you should be aware of the tax consequences of transferring ownership of a life insurance policy

What Are the Tax Consequences of Cashing in a Life Insurance Policy?

In a life settlement, your premiums are your basis in the policy and are not taxed. However, you will have to pay taxes on any amount you earn that exceeds the premiums you have paid. 

Here is an example: If you paid $60,000 in premiums and received an $80,000 life settlement, you would need to pay taxes on the $20,000 difference.

Although tax liability might be a point of concern for some, partnering with a financial advisor or tax professional will help you navigate this process to minimize the impact tax liability has on your finances.

How Does Cashing Out a Life Insurance Policy Work?

When pursuing a life settlement, all or a portion of your policy is sold to a third-party for a one time payout. Once your policy has been sold and you have collected your payout, the buyer will become the new beneficiary of your policy and pay your premiums. After you sell your policy to the buyer, they will become your policy’s beneficiary and will pay your remaining premiums. In turn, your life insurance death proceeds are received by your buyer after your passing. 

It is important to note that there are specific qualifications you need to meet in order to sell your life insurance policy. 

  1. Universal life, whole life, second-to-die, or convertible term policies are all eligible for a life settlement, so long as your policy is at least two years old.  
  2. You must be 65 or older. 
  3. A lower monthly premium increases the likelihood of a broker purchasing your policy. 
  4. You must have a life expectancy of 15 years or less.  
  5. Your death benefit needs to be at least $100,000. 

If you meet all of these qualifications, then you can successfully begin the life settlement process. 

Sell Your Policy With Ease and Partner With Life Settlement Advisors

Choosing to cash in a life insurance while still alive gives you the financial flexibility you need to increase your current cash flow. Additionally, life settlements are a very safe and reliable way to get some extra cash on hand. If you have questions about the life settlement process we have plenty of resources for you to explore: 

Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.

Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.

I am always happy to answer any questions about these life-transforming transactions.

Leo LaGrotte
Life Settlement Advisors

Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.
Life Settlement Advisors
Leo LaGrotte
At Life Settlement Advisors, we strive to be a voice of confidence and assurance for our clients. Our goal is to educate you about the life settlement process so you can make an educated decision about whether it is right for you.