When financial pressures rise or priorities change, many people start to wonder if they can cash out or sell their term life insurance policy. Maybe you no longer need the coverage, or maybe you’d like to recover some of the money you’ve paid in premiums.

Unfortunately, for most policyholders, selling a term life insurance policy isn’t a viable option  and even when it is, the tax consequences can be more costly than expected. Let’s break down what’s possible, what’s not, and how to approach this decision strategically.

Why Term Life Insurance Is Hard to Sell

Term life insurance is designed for one simple purpose: to provide a death benefit if you pass away during the policy term. It doesn’t build cash value like whole life or universal life policies do, which means there’s usually nothing tangible for investors to buy.

When investors purchase a life insurance policy (called a life settlement), they’re essentially betting that they’ll receive the death benefit sooner rather than later. Because term life policies have no investment component and expire after a fixed period, there’s no guarantee of payout.

That’s why, unless the insured person is terminally ill or expected not to outlive the policy term, investors typically have little to no interest.

In other words, for most people, selling a term life policy to third-party investors isn’t realistic.

A Possible — But Risky — Alternative: Selling to a Family Member

If you’re determined to get some value from your policy, there is one potential workaround: you can transfer your term life insurance policy to a relative.

Here’s how it works:

• You name your relative as the new beneficiary.
  
• They agree to take over the premium payments.
  
• In exchange, they pay you an agreed-upon amount upfront. 

On paper, it might sound simple  but this kind of arrangement opens a complex can of tax consequences that most policyholders aren’t prepared for.

Understanding the Tax Consequences

When you transfer or sell a term life policy, the IRS treats the transaction as a “transfer for value.” This changes how both you and the new policy owner are taxed, and it can eliminate the typical tax-free benefit that life insurance usually provides.

Let’s go through the major implications.

1. Taxable Transfer

When you sell or transfer your policy in exchange for money, the IRS will likely treat the transaction as a taxable event.

You, the original policy owner, must report any income you receive that exceeds your basis in the policy.

Your basis is the total amount you’ve paid in premiums over time.

For example:

• You’ve paid $10,000 in total premiums.
  
• Your relative offers to buy the policy from you for $14,000. 

That $4,000 difference is considered taxable income.

If you’ve held the policy for more than a year, you may qualify for long-term capital gains treatment, which is generally taxed at lower rates than regular income. But you still owe tax on the gain.

2. Taxable Death Benefit

Under normal circumstances, the death benefit from a life insurance policy is completely tax-free for the beneficiary. But once the policy is transferred for value, this tax-free status changes.

If you die while the policy is still active, your relative (now the beneficiary and policyholder) will owe ordinary income tax on part of the payout.

Here’s how the IRS looks at it:

• The beneficiary can exclude only the amount they paid for the policy, plus any premiums paid after the transfer.
  
• The rest of the death benefit becomes taxable income. 

Example:

• The death benefit is $500,000.
  
• Your relative paid $20,000 for the policy and covered $5,000 in premiums.
  
• That means $25,000 is tax-free and the remaining $475,000 is taxable income.
  

That’s a major financial hit, especially when the original intent of life insurance is to provide tax-free support to loved ones.

3. No Deductible Loss

If the policy expires before you pass away — meaning the beneficiary gets nothing — the IRS won’t allow a deductible loss for the money they paid.

That means both you and the relative could end up losing money with no tax benefit to offset it.

Why the IRS Is So Strict About Term Life Transfers

The IRS views the transfer-for-value rule as a safeguard against people using life insurance policies as investment vehicles rather than protection tools.

When money changes hands in exchange for an insurance benefit, it’s no longer seen as a personal or family protection contract, it’s treated like an asset sale. That’s why these transactions lose their tax-free status.

So while transferring your policy might seem like a quick financial fix, it often leads to complicated reporting requirements and unexpected tax liabilities for everyone involved.

When Does Selling a Life Insurance Policy Make Sense?

While term life policies are rarely sellable, permanent life insurance (such as whole or universal life) may have legitimate market value because of their cash accumulation feature.

If you have a permanent policy you no longer need, selling it through a life settlement may be a viable option — but it’s still essential to weigh the tax implications and potential loss of future protection.

For term life insurance, the best course of action may often be to:

• Convert it to a permanent policy (if your insurer allows it), then explore a sale later.
  
• Adjust or reduce coverage to fit your current financial needs.
  
• Work with a financial advisor or tax professional before making any move that could trigger taxable income.
  

1. Selling a term life insurance policy is rarely possible unless you’re terminally ill.
   
2. Private transfers to relatives can be done, but they come with major tax consequences.
   
3. The transfer-for-value rule can make both the upfront payment and future death benefits taxable.
   
4. No deductible loss is allowed if the policy expires with no payout.
   
5. Consulting a professional before making changes to your policy can save you from large, unexpected tax bills.
   

Term life insurance serves a valuable purpose  protecting your loved ones during your working years. But once your financial situation changes, it’s natural to wonder if you can get something back from all those premiums you’ve paid.

While cashing out a term life policy might seem like a smart financial decision in theory, in practice it’s rarely beneficial and it can create serious tax headaches if done improperly.

Before making a move, consider talking with a qualified tax advisor or financial planner who understands both the tax code and life insurance rules. They can help you explore safer strategies, such as converting your policy or restructuring your coverage, that preserve your protection without triggering unnecessary taxes.

 

If you’re currently evaluating your insurance or tax strategy, book a consultation today. Our team can help you understand your options, minimize tax exposure, and make confident, well-informed decisions for your future.