Your Complete Guide

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Understanding Life Settlement Basics

What is a Life Settlement?

A life settlement is the sale of an existing life insurance policy to a licensed third-party buyer for a lump-sum cash payment that’s typically greater than the policy’s surrender value but less than its death benefit. After the sale, the buyer becomes the new policy owner, assumes responsibility for future premiums, and receives the death benefit when the insured passes away.

Who Typically Considers a Life Settlement?

Life settlements are often ideal for seniors or policy owners who no longer want, need, or can comfortably maintain their life insurance policy. This may be due to changing financial goals, rising premiums, or a desire to access the policy’s current value for other priorities such as retirement, medical care, or estate planning.

Health and Age Qualifications:

  • Age 65 or younger: May qualify if diagnosed with a terminal, severe, or life-threatening illness.
  • Ages 65–74: May qualify with a serious chronic condition and manageable ongoing premium payments.
  • Ages 75–80: May qualify with identifiable health impairments and affordable premium obligations.
  • Age 80 and older: Most individuals in this age group qualify for review.
  • All individuals with an identifiable terminal illness qualify, regardless of age.
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What Policies May Qualify?

Many types of policies may qualify, including Universal Life, Whole Life, Variable Life, Indexed Universal Life, and convertible Term Life policies (Term policies must still be eligible for conversion into a permanent policy). All policies must be beyond the two-year contestability and suicide period that begins on the original issue date of the policy.

 

How Value Is Determined

The market value of a policy depends on several factors, including:

  • The insured’s age and health status
  • The policy’s death benefit amount
  • Ongoing premium costs
  • Type and structure of the policy Generally, policies with lower premiums and higher face amounts hold greater value.

The Process at a Glance

  • 1.

    Eligibility Review

    Assess policy type, premiums, and contestability status.

  • 2.

    Market the Policy

    Licensed brokers present the policy to qualified institutional buyers.

  • 3.

    Receive Offers

    Competing bids are gathered and reviewed with the policy owner.

  • 4.

    Accept & Close

    Once an offer is accepted, ownership transfers and payment is made to the seller.

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Benefits and Considerations Potential Benefits:

  • Immediate access to cash that can exceed the surrender value
  • Elimination of ongoing premium payments
  • Flexibility to use funds for any personal or financial need Important Considerations
  • The death benefit is transferred to the buyer upon sale
  • Proceeds may be subject to taxes
  • Regulations and disclosure requirements vary by state.