Life insurance • Policy options
Life Settlements: How Selling a Life Insurance Policy Works
A life settlement is the sale of a life insurance policy you no longer need to a licensed provider, who pays you a lump sum, takes over the premiums, and collects the death benefit later. The payment is less than the death benefit but can be more than the cash surrender value, so it’s worth comparing before you let a policy lapse or surrender it.
This guide explains how life settlements work, the Arizona rules that protect sellers, how the payment is taxed, and alternatives to consider.
Request a life insurance quote
Tell us about the policy you’re thinking of selling, and a licensed agent will walk through your options. Submitting the form does not bind coverage.
If the form does not load, call 888-387-3687, Monday through Friday, 9:00 to 5:00, or email info@blakeinsurancegroup.com.
Prefer to quote online yourself?
Start a life insurance quote online, without waiting for a call back.
Start a life insurance quote online →Life insurance quotes through our secure Simplicity LifeLink portal.
Sponsored. Each link opens the partner’s website in a new tab, where its terms and privacy policy apply. Blake Insurance Group may be compensated if you buy.
How a life settlement works
- You apply, often through a broker, who represents you and owes you a fiduciary duty under Arizona law (A.R.S. § 20-3201).
- Providers review the policy and the insured’s medical records and make offers.
- You accept an offer, and the provider becomes owner and beneficiary.
- The provider deposits the money in escrow within three business days of receiving your transfer documents and pays you within three business days after the insurer acknowledges the transfer (A.R.S. § 20-3211).
Who typically considers a life settlement
- Older policyholders whose children are grown and no longer need the coverage.
- Owners whose premiums have become hard to afford, especially universal life with rising costs.
- Insureds whose health has changed since the policy was issued.
- Business owners with key person or buy-sell coverage they no longer need; see key person insurance.
- Owners of term policies that can still be converted to permanent coverage.
Each provider sets its own criteria for age, health, and policy size.
Settlement vs. surrender vs. letting it lapse
| Option | What you get | What heirs get |
|---|---|---|
| Keep paying | Nothing now | Full death benefit |
| Let it lapse | Nothing (term) or nonforfeiture value | Nothing |
| Surrender | Cash surrender value | Nothing |
| Life settlement | A lump sum, often above cash value | Usually nothing, unless part of the benefit is retained |
Arizona seller protections
- Two-year rule: you generally can’t settle a policy within two years of issue, with exceptions such as terminal illness, a spouse’s death, divorce, retirement, or disability (A.R.S. § 20-3211).
- Disclosures: the provider must explain alternatives such as accelerated benefits or policy loans, possible taxes, effects on creditors and public benefits, and rights you may lose (A.R.S. § 20-3204).
- Broker pay: the broker must disclose its compensation and reconcile the gross offer to your net proceeds.
- 15-day rescission: you can cancel within 15 days after signing and receiving all disclosures by returning the money.
Rules in other states
Most states regulate life settlements, but the details differ, including how long you must wait after a policy is issued, how many days you have to cancel, and which providers and brokers must be licensed. The rules of the state where the owner lives generally apply, so ask a broker or agent to confirm them before you sign.
How the payment is taxed
Under the 2017 tax law, the part of the payment up to your basis (generally premiums paid) is tax-free, the part above basis up to the cash surrender value is ordinary income, and anything above the cash surrender value is generally a capital gain (ThinkAdvisor). Payments to someone who is terminally or chronically ill may be treated differently; see viatical settlements. Talk with a tax adviser before you sell.
Worked tax example
Say you paid $60,000 in premiums, the policy’s cash surrender value is $90,000, and you sell it for $150,000. Under the tiers described above:
- $60,000 (your basis) is tax-free.
- $30,000 (cash value above basis) is ordinary income.
- $60,000 (above cash value) is generally a long-term capital gain.
If you had surrendered instead, you’d have received $90,000, with $30,000 taxable as ordinary income. Actual basis can be adjusted for dividends, loans, and other items, so confirm the numbers with your insurer and tax adviser (ThinkAdvisor).
Tax reporting
The buyer generally reports the sale to the IRS on Form 1099-LS and sends you a copy showing the amount paid and the date of the sale (IRS instructions for Form 1099-LS). Keep it with your tax records.
Alternatives to consider
- Converting term coverage to permanent, if your policy allows; see convertible term life.
- Accelerated death benefits if the insured is seriously ill; see riders.
- A policy loan, reduced paid-up coverage, or a 1035 exchange.
- Lowering the death benefit to reduce premiums.
Checklist before you sell
- Ask your insurer for the current cash surrender value and an in-force illustration.
- Check the conversion deadline on any term policy.
- Get offers from more than one provider, and ask the broker to show its compensation in writing (A.R.S. § 20-3204).
- Confirm the provider and broker are licensed in your state.
- Ask how often the provider will contact you about the insured’s health.
- Talk with a tax adviser, and with the agency if you get public benefits.
- Tell your beneficiaries; they will no longer receive the death benefit.
Life settlement FAQs
What is a life settlement?
Selling a life insurance policy to a licensed provider for a lump sum that’s less than the death benefit but often more than the cash surrender value.
Who qualifies for a life settlement?
Providers usually look for older insureds or those with health changes and larger policies, but each provider sets its own criteria.
Is a life settlement taxable?
Often partly. Amounts above your basis can be taxed as ordinary income or capital gain.
Can I cancel a life settlement in Arizona?
Yes, within 15 days after signing and receiving required disclosures, by returning the money.
How much can I get for my life insurance policy?
It depends on the insured’s age and health, the death benefit, and the premiums; get multiple offers to compare.
Can I sell a term life insurance policy?
Sometimes, especially if it can still be converted to permanent coverage.
Will my beneficiaries get anything after a life settlement?
Usually not, unless you keep part of the death benefit as part of the deal.
Related guides
Important information
Compensation. The link in the partner quote box near the top of this page is sponsored, and Blake Insurance Group may be paid if you make a purchase. Sponsored placement does not affect the other information on this page.
Independent agency. Blake Insurance Group LLC is an independent insurance agency. Licensed insurance producer NPN 16944666. Licensed states: AZ, AL, TX, CA, NY, OH, FL, NC, VA, GA, OK, NM, IA, KS, MI, NE, SC, SD, WV, IL, NJ, PA, TN, and WA. Which insurance companies we can quote depends on our current appointments, the product, and your state. Mentioning a company on this page does not mean we represent it.
Not tax or legal advice. Tax and insurance rules summarized here are general information as of November 2026 and can change. Talk with a tax professional or attorney about your situation.
Availability. Coverage, prices, discounts, and eligibility vary by insurer, state, and applicant, and are subject to underwriting. The issued policy controls.
Your next step
Tell us about your policy, and a licensed agent will review your options before you sell.
