The Letter That Six States Make the Insurer Send

Between 2021 and 2025, roughly 15,000 American life insurance policies were sold rather than surrendered, for about 3.6 billion dollars. The trade association that collects those figures puts the 2025 average payment at 212,066 dollars a policy, against an average cash surrender offer from the issuing insurer of 24,360 dollars. The same contract was worth close to nine times more to an outside buyer than to the company that wrote it.

The interesting part is not the arbitrage. It is the silence around it. In 2018 the California Department of Insurance, citing industry research, said older Americans lose approximately 112 billion dollars a year on policies that lapse or are surrendered, and that 86 percent of Americans do not realize a policy can be sold at all. Forty-three states and Puerto Rico regulate the transaction. Six require the insurer to mention that it exists.

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What Actually Changes Hands

The structure is simpler than the name suggests. A buyer becomes the new owner and beneficiary, takes over every future premium, and collects the death benefit whenever it comes due. The seller takes cash now, less than the face amount and more than the insurer offered to end the contract.

Two intermediaries sit in the middle and they are not the same thing. A broker works for the seller, shops the policy to competing buyers, and since the model act was revised in 2007 owes that seller an explicit fiduciary duty. A provider is the party that becomes the new owner. Georgia's regulation adds a detail worth knowing: a broker's fee must be computed as a percentage of the offer obtained rather than of the face value.

Timing is constrained. Thirty states require a policy to be at least two years old before it can be sold and eleven require five, with exceptions for terminal or chronic illness, divorce, retirement or disability. After signing, Texas, Rhode Island and Georgia each allow 15 days to rescind by returning the money.

The Mechanics of a Notice That Arrives Before the Lapse

The notice requirement comes from a model act adopted by state legislators in November 2010 and readopted as recently as April 2026. It is narrow by design. It applies when the insured is 60 or older, or is known to the insurer to be terminally or chronically ill, and one of three things happens: the owner asks to surrender, the owner asks for an accelerated death benefit, or the insurer sends notice that the policy is about to lapse. The insurer must then say that alternatives exist and list eight of them, including accelerated benefits, policy loans, conversion, reduced coverage and sale through a settlement contract.

Washington enacted its version effective July 2009 and Oregon effective January 2010. Kentucky publishes the actual form, which names all eight options on one page. The lapse-notice disclosure need not be repeated more than once in any twelve-month period.

Everywhere else, a lapse notice is a lapse notice. It states what is owed and what happens if it is not paid, and nothing requires it to mention that the contract about to lapse has a market price.

Who Is Watching

Supervision is uneven. Five states and the District of Columbia have no life settlement framework at all, and Michigan and New Mexico regulate only the older viatical form. As of August 2026 there were 301 licensed providers holding 685 state licenses between them.

The last federal look at this market remains instructive. In 2010 the Government Accountability Office found broker commissions near 15 percent of gross proceeds in 2006, falling to about 9 percent by 2009, and reported that 24 of the 34 state regulators with authority to examine brokers had conducted no examination in five years. The abuse that prompted the 2007 revisions, policies originated by investors on strangers, has not disappeared: a federal appeals court in 2026 voided two such policies worth 8 million dollars for lack of insurable interest.

What the Seller Has to Check First

Two consequences sit outside the contract. The tax treatment improved in 2017, when Congress stopped requiring sellers to reduce their cost basis by the cost of insurance, a change applied retroactively to transactions since August 2009; the buyer files a 1099-LS and the insurer a 1099-SB, so the sale is reported either way. The second is means-tested benefits. Proceeds are an asset, and Texas built an answer into its Medicaid application in 2013, requiring the state to tell applicants the option exists.

One industry analyst puts the gross annual potential of this market near 224 billion dollars of face value against actual volume under 5 billion, and the distance between those numbers is a disclosure problem rather than a pricing one. For a household weighing whether to keep paying, two facts decide it: the comparison that matters is a competing offer against the surrender value rather than against the face amount, and in forty-four states nobody is obliged to raise the subject.

DISCLAIMER

The content in this email does not constitute an offer or solicitation to buy or sell any financial instrument. All commentary is general in nature and is not directed at any individual investor.

— John Stone