Life Insurance Settlement
A life insurance settlement, usually called a life settlement, is the sale of a life insurance policy you already own to a buyer other than the insurance company that issued it. You receive a lump sum. The buyer becomes the owner, pays the premiums after the sale, and names itself (or its investor) as the beneficiary. When the insured person dies, the death benefit is paid to that new owner, not to the beneficiaries you originally chose.
State insurance laws generally describe the price as more than the policy's cash surrender value and less than the death benefit. That is the idea of the transaction. It is not a promise that a buyer will make an offer, or that the offer will be worth taking. If a buyer will not pay more than the insurer would pay you to surrender the policy, selling it does not improve on surrender.
Who a life settlement can suit
A settlement is a way to turn a policy you no longer want to keep into cash, when a buyer is willing to pay for it. People look at it when the reason they bought the coverage has changed. Examples include:
The beneficiaries are financially independent, or the person the policy was meant to protect has died.
A debt the policy was meant to cover, such as a mortgage or a business loan, has been paid off.
Premiums are no longer affordable, and the alternative is letting the policy lapse.
The policy is individually owned permanent insurance, or term insurance that can still be kept in force or converted.
Buyers decide what they will pay from the premiums they expect to take over and how long they expect to wait for the death benefit. People who are older, or whose health has worsened since the policy was issued, are the ones buyers usually consider. There is no age, diagnosis, or policy size on this page that guarantees a sale. A buyer can decline any policy.
A settlement is a poor fit when someone still depends on the death benefit, and in cases like these:
You do not personally own the policy. Group life through an employer usually cannot be sold.
The policy is new, or it is still in the period when the insurer can contest a claim for misstatements on the application.
A large loan already sits against the cash value. That loan is normally repaid out of the sale proceeds.
The contract already has an accelerated death benefit or a similar rider that pays cash for the situation you are facing.
How it differs from surrender
Surrendering a policy means giving it back to the insurance company. The insurer pays the cash surrender value, if there is any, after loans and surrender charges. Coverage ends. Your beneficiaries are not paid a death benefit later.
A life settlement is a sale to someone else. Coverage does not end. It continues for the new owner, who receives the death benefit. You give up that benefit in exchange for the sale price. Term insurance often has little or no cash surrender value, so surrender may pay nothing even when a buyer would still look at the policy. Whether a term policy can be sold depends on the contract, the time left on it, and whether any buyer wants it.
Letting a policy lapse is a third outcome. Premiums stop, the policy ends, and there may be no payout at all. A lapse, a surrender, and a settlement are different choices. None of them is automatically the right one.
How it differs from a viatical settlement
A viatical settlement is also a sale of an existing life policy to a third party, but it is for a seller who is terminally ill and, in some states, chronically ill. Those states set the medical definition, and some use a life-expectancy test. The consumer protections can differ from the rules for a life settlement, including licensing and disclosures.
A life settlement does not require the seller to be terminally ill. Buyers still ask about health, because health changes what they will pay. Which statute applies, viatical or life settlement, depends on the state where the policyowner lives and on that state's definitions. The name a caller uses is not what decides it.
An accelerated death benefit is not either of these sales. It is a feature of some policies that pays part of the death benefit early, to the beneficiary or the owner, when the contract's trigger is met. The insurer pays it. You do not transfer the policy to an investor. A licensed agent can tell you whether your contract has this feature before you talk to a settlement company.
Tax and regulatory caveats
This page is general education. It is not tax, legal, or insurance advice, and it is not an offer to buy a policy. Rules change, and they depend on the contract and on where you live.
Tax. Part of a life settlement can be a nontaxable return of premiums you already paid, and part can be taxable. How much is taxable, and whether it is ordinary income or capital gain, depends on the policy and on your basis in it. Your state may tax the proceeds as well. A lump sum can also affect eligibility for means-tested benefits such as Medicaid. A tax professional should run the numbers before you sell. Do not rely on a buyer's illustration as your tax return.
State regulation. State insurance departments regulate these sales. The rules are not the same in every state. They cover who must be licensed, what must be disclosed, and whether you have a short time to cancel after you sign or after you receive the money. Read that deadline in the contract you are given. A provider or broker who will not name the state license they hold is a reason to stop.
Your information. The buyer will usually ask for medical records and may ask you to allow later updates about the insured person's health. That is how the buyer tracks a policy it owns. Sign an authorization only after you know who receives the information and how long they can keep asking.
Do not buy a policy in order to sell it. A life settlement is a sale of coverage you already own for a personal, family, or business reason. Taking out a new policy mainly so an investor can own it is a different arrangement. Those transactions are restricted. They can put the policy at risk, including the insurer's ability to deny a claim or rescind coverage.
After the sale. Once any cancellation window in your contract has passed, the sale is meant to be final. You cannot name a new beneficiary. Money you receive may be within reach of creditors. An outstanding policy loan is normally paid from the proceeds before you are.
Working with a licensed agent
Talk with an insurance agent who is licensed in your state before you agree to sell. The useful conversation is about whether you still need the coverage, not only about the size of an offer. Alternatives that keep or replace coverage include keeping the policy, reducing the death benefit, a policy loan, an accelerated benefit if the contract includes one, or, where the tax rules allow it, an exchange into another life insurance or annuity contract. Those are different transactions from a life settlement. The life insurance guide and the annuity guide describe the products themselves.
If you still want to explore a sale, ask these questions and get the answers in writing:
Is the person a life settlement provider or broker, and in which state are they licensed?
Who does the broker represent, you or the buyer? How are they paid, and is that pay taken from your proceeds?
What is the cash surrender value the insurance company would pay today, and how does the written offer compare?
What happens to loans, riders, and the beneficiaries you named?
What health information are you authorizing, and can you cancel the sale? By what date?
Get the surrender quote from the insurance company, not only from the buyer. Compare that figure, the written offer, and the death benefit your family would give up. A larger offer is not useful if you still need the coverage.
Agent Review lists agents and agencies so you can read about them and contact them. It does not buy life insurance policies, broker life settlements, or recommend a settlement company. A listing is not a statement that selling your policy is appropriate. Verified Agent status checks credentials and identity. It is not an endorsement. You can search agents and confirm the person you speak with is licensed where you live.