insurance

Life Settlement

The sale of an existing life insurance policy to a third party for more than the policy's cash surrender value but less than the death benefit. The buyer becomes the new beneficiary and assumes responsibility for paying future premiums.

Example

“Rather than letting his $400,000 life insurance policy lapse, 78-year-old Frank sold it through a life settlement for $120,000 to fund his retirement expenses.”

Memory Tip

Life Settlement = Selling your life policy - you settle for less than the death benefit but more than surrender value.

Why It Matters

Life settlements provide seniors with immediate cash from policies they no longer need or can't afford, often yielding significantly more than surrendering the policy to the insurance company. This can fund healthcare, retirement expenses, or other financial needs.

Common Misconception

Many people think life settlements are scams or only available to terminally ill individuals. In reality, healthy seniors over 65 with policies worth $100,000+ can often qualify for legitimate life settlements through regulated market transactions.

In Practice

George, age 82, owns a $750,000 whole life policy with a cash surrender value of $85,000 and annual premiums of $18,000. A life settlement company offers him $225,000 for the policy after medical underwriting shows a 10-year life expectancy. George accepts, receiving nearly three times the surrender value. The buyer will pay approximately $180,000 in future premiums over 10 years and expects to receive the $750,000 death benefit, generating a projected 12% annual return on their total $405,000 investment.

Etymology

The term emerged in the 1980s during the AIDS crisis when terminally ill patients needed immediate cash and began selling their life insurance policies. 'Settlement' derives from Old English 'setlan' meaning to resolve or conclude.

Common Misspellings

life setlementlife settlemntlive settlementlife settlment

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