Glossary
Life settlement, defined
The sale of an existing policy by an older insured who is not terminally ill to an investor, for a cash payment above the surrender value. The investor takes over as owner and beneficiary and pays the premiums until the insured dies.
In practice
It is an option for someone who no longer needs or can afford a policy that has resale value, typically a permanent or convertible term policy on an insured well past retirement age. The price depends heavily on health, so the buyer asks for medical records and produces its own life expectancy estimate. The seller loses all coverage and the proceeds are generally taxable above the premiums paid. Before selling, compare it with surrendering, reducing the face amount, or letting an adult child or a trust take over the premiums. Brokers take a commission from the price, and getting more than one offer matters.
A worked example
Suppose a seventy-eight-year-old holds a $1,000,000 universal policy with a $60,000 cash surrender value and premiums that have risen to $40,000 a year. An investor offers $180,000. Surrendering pays $60,000; selling pays $180,000 and ends the premiums; keeping it costs $40,000 a year for a benefit the heirs would receive later. Hypothetical figures.
Applies to: Life InsuranceWhole Life Insurance