Glossary term
Life Settlement
A life settlement is the sale of an existing life insurance policy to a third party for more than surrender value but less than the death benefit.
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What Is a Life Settlement?
A life settlement is the sale of an existing life insurance policy to a third party. The seller receives a cash payment that is usually more than the policy's cash surrender value but less than the death benefit. The buyer becomes the policy owner, pays future premiums, and receives the death benefit when the insured dies.
Life settlements are most often considered by older policyholders who no longer need, want, or can afford a policy. They can create liquidity, but they also give up the death benefit, may create taxes, and can affect eligibility for certain needs-based benefits.
Key Takeaways
- A life settlement sells a life insurance policy to a third party.
- The seller gives up control of the policy and the future death benefit.
- The buyer typically pays future premiums and receives the death benefit.
- Taxes, fees, privacy, and benefit eligibility should be reviewed before selling.
- Alternatives include keeping the policy, reducing coverage, borrowing, surrendering, or changing beneficiaries.
How a Life Settlement Works
The policy owner applies through a provider or broker. Buyers evaluate the policy's death benefit, premiums, cash value, insured person's life expectancy, and policy terms. If a sale is completed, ownership and beneficiary rights transfer to the buyer.
Step | What happens | What to watch |
|---|---|---|
Policy review | Policy details and insured information are evaluated. | Privacy and medical information sharing. |
Offer | A buyer offers cash for the policy. | Fees, commissions, and competing bids. |
Transfer | Ownership and beneficiary rights move to the buyer. | Loss of death benefit for original beneficiaries. |
Premium payments | The buyer keeps the policy in force. | Seller usually no longer controls the policy. |
Death benefit | Buyer collects after the insured dies. | Original family or trust no longer receives it. |
Financial Tradeoffs
A life settlement can be better than surrendering a policy if the policy has market value and the owner no longer needs the coverage. But selling can create taxable income, reduce assets intended for heirs, and affect Medicaid or other benefits. It may also require disclosure of health information to buyers and service providers.
Policyholders should compare the offer with cash surrender value, policy loans, reduced paid-up options, death benefit needs, and the cost of keeping coverage. The highest offer is not always the best answer if the policy still solves an estate, liquidity, or family protection need.
The Bottom Line
A life settlement turns a life insurance policy into current cash by selling future death benefit rights. It can be useful, but the decision should be weighed against taxes, fees, privacy, benefit eligibility, and the lost protection for beneficiaries.