What is a life settlement?
The sale of a life insurance policy to a third-party investor for more than its cash surrender value and less than its death benefit.
The basic transaction
You own a life insurance policy. Instead of letting it lapse, surrendering it to the insurer, or continuing to pay premiums you no longer want to pay, you sell it. A buyer pays you a lump sum now, takes over the premiums from that point, and collects the death benefit when the insured dies. Your beneficiaries no longer receive anything from that policy.
Why the secondary market exists
Life insurance policies are assets. Like most assets, they have a market value that is not always the same as what the original issuer will pay to take them back. The life settlement market developed because buyers — typically institutional investors — are willing to pay more than the cash surrender value for the right to collect the death benefit later.
What it is not
A life settlement is not a loan against the policy. It is not an accelerated death benefit. It is not a surrender. It is a sale — ownership transfers, the buyer takes over the premiums, and the transaction is permanent.
The viatical settlement
A viatical settlement is the same basic transaction, but for someone who is terminally or chronically ill. It is regulated separately, typically pays a much larger share of the death benefit, and the proceeds may qualify for exclusion from federal income tax. If there is a diagnosis, this is the route to investigate first.
Find out whether your policy has a market.
Most do not. Checking costs nothing and does not change your coverage.