This glossary defines every significant life settlement term in plain English, organized alphabetically from accelerated death benefit to viatical settlement. The life settlement world borrows vocabulary from insurance, investing, medicine, and law all at once, and unfamiliar jargon is one of the main reasons policyholders feel outmatched when evaluating their options. Each definition below explains not just what a term means but why it matters to someone considering a sale.
Use it as a reference while reading offers, contracts, and disclosures — or read it straight through as a compact education in how the market works.
In This Article
- A-B: From Accelerated Death Benefits to Brokers
- C-D: From Cash Surrender Value to Discount Rates
- E-I: From Escrow to Insurable Interest
- L-M: From Lapse to Mortality Tables
- N-P: From NAIC to Providers
- R-S: From Rescission to Survival Curves
- T-V: From Tertiary Markets to Viaticals
- How to Use This Vocabulary in a Real Transaction
- Frequently Asked Questions
A-B: From Accelerated Death Benefits to Brokers
Accelerated death benefit (ADB). A policy rider allowing a terminally or chronically ill insured to receive part of the death benefit early from the carrier itself. An alternative worth checking before pursuing a settlement, since it involves no sale.
Actual-to-expected (A/E) ratio. A report card for life expectancy underwriters: compares deaths that actually occurred in a underwritten population against the number predicted. Buyers use A/E records to decide which firms’ estimates to trust.
Attending physician statement (APS). A treating doctor’s summary of a patient’s conditions and history — core raw material for the life expectancy assessment.
Beneficiary. The person or entity entitled to the death benefit. In a settlement, the buyer becomes both owner and beneficiary — the change families most need to understand before selling.
Bid. A buyer’s offer for a policy, generated by a discounted cash flow model. Multiple bids gathered in an auction are how sellers discover the market price rather than one buyer’s opinion.
Broker (life settlement broker). A licensed intermediary who represents the policy owner, shops the policy to multiple providers, and owes duties to the seller. Compensation must be disclosed under state law. Contrast with provider, and see broker vs. provider for the full distinction.
Grigsby v. Russell belongs here alphabetically by case name for many readers: the 1911 Supreme Court decision — read it at Justia — holding that a life insurance policy is personal property the owner may sell. Every other term in this glossary exists because of it.
C-D: From Cash Surrender Value to Discount Rates
Cash surrender value (CSV). What the insurance carrier pays if you cancel a permanent policy — accumulated cash value minus surrender charges. The baseline against which settlements are judged: qualifying policies typically settle for 4-8 times CSV, the comparison at the heart of life settlement vs. surrender.
Chronic illness. A condition impairing daily living activities; relevant to certain riders and to viatical-style tax treatment in some circumstances.
Contestability period. The first two years of a policy, during which the carrier may rescind for material misrepresentation. Related to, but distinct from, the settlement seasoning rule requiring a policy to be in force generally 2+ years before sale.
Cost of insurance (COI). The internal mortality charge in universal life policies, rising with age. COI increases are a common reason owners can no longer afford coverage — and a risk buyers price when bidding.
Death benefit / face value. The amount the carrier pays at the insured’s death. Settlements typically pay 10-35% of this figure.
Discounted cash flow (DCF). The valuation method behind every institutional bid: project premiums out and death benefit in across a survival curve, then discount to present value — the machinery of pricing mechanics.
Discount rate. The annual return a buyer requires; the single most price-sensitive assumption in the model. Higher rates mean lower offers, as explained in discount rates and life settlement pricing.
E-I: From Escrow to Insurable Interest
Escrow. The neutral holding arrangement for the seller’s payment during closing: funds are deposited with an escrow agent before ownership changes, and released when the carrier confirms the transfer. Required practice under state settlement statutes — never close without it.
Face value. See death benefit; the policy’s stated payout amount.
Grace period. The 30-31 days after a missed premium during which coverage continues. For owners, a safety margin; for buyers, the operational deadline their servicing teams manage on every policy they hold.
In-force illustration. A carrier-generated projection of a policy’s future values and required premiums. Buyers use it to solve for the minimum funding premium; sellers should order a current one early in the process described in how life settlements work.
Institutional investor. The capital behind the market: pension funds, asset managers, and ILS managers seeking returns driven by mortality experience, non-correlated with equities — profiled in institutional investors in life settlements.
Insurable interest. The legal requirement that whoever takes out a policy has a genuine interest in the insured’s continued life (self, family, business partner). Required at policy issuance; after valid issuance, the policy may be sold to anyone — the boundary drawn in Grigsby v. Russell and policed today through anti-STOLI rules.
Insurance-linked securities (ILS). Investment structures whose returns derive from insurance risks rather than markets; ILS managers are among the buyers of longevity exposure and settled policies.
IRR (internal rate of return). The annualized return a buyer realizes on a policy — known only after maturity, since it depends on actual survival.
L-M: From Lapse to Mortality Tables
Lapse. Termination of coverage when premiums stop and grace periods expire — the worst outcome for an unwanted policy, yielding nothing. A large share of senior-owned face value lapses annually without owners checking the market, per market size and statistics.
Life expectancy (LE). The median remaining lifespan estimated by medical underwriting — the input that most determines an offer. Not a prognosis for an individual; a statistical statement about similar profiles.
Life expectancy report. The written product of an independent underwriting firm: median LE in months, mortality multiplier, and survival curve. Buyers customarily order two, each taking roughly 2-6 weeks — the convention explained in independent life expectancy reports.
Life settlement. The sale of an existing life insurance policy by its owner to a licensed provider for more than cash surrender value and less than face value — the transaction defined from first principles in what is a life settlement.
Longevity risk. For buyers, the risk that insureds live longer than estimated, adding premium years and delaying benefits; the asset class’s dominant risk.
Maturity. In settlement usage, the insured’s death and the resulting payment of the death benefit to the policy’s owner.
Minimum funding premium. The smallest premium stream that keeps a policy in force — the premium assumption sophisticated buyers actually price with, often lower than what the owner has been billed.
Mortality table. The actuarial dataset mapping age and health to death probabilities; the base layer beneath every LE report and every bid.
| Term | One-Line Definition | Why It Matters to a Seller |
|---|---|---|
| Cash surrender value | What the carrier pays to cancel the policy | The baseline any offer must beat — settlements typically pay 4-8x CSV |
| Life expectancy report | Independent medical-actuarial estimate of remaining lifespan | The input that most determines the offer; two are customarily ordered |
| Provider | State-licensed company that buys policies from owners | The regulated counterparty whose license you should verify |
| Broker | Licensed intermediary representing the seller | Creates the multi-bid auction; compensation must be disclosed |
| Discount rate | Annual return the buyer requires | Invisible in the offer but drives it — higher rate, lower price |
| Escrow | Neutral holding of funds during closing | Protects the seller’s payment before ownership transfers |
| Rescission period | Post-closing cancellation window (15-30 days by state) | A legal undo option after signing |
| STOLI | Policies originated for investors, violating insurable interest | Prohibited; the reason for the 2+ year seasoning rule |
| Tertiary market | Institutions trading settled policies among themselves | Indirectly supports the prices consumers receive |
| Rev. Rul. 2009-13 | IRS three-tier tax treatment of settlement proceeds | Determines your net after-tax outcome |
N-P: From NAIC to Providers
NAIC. The National Association of Insurance Commissioners — the standard-setting body of state insurance regulators whose Life Settlements Model Act (the 2007 revision of earlier viatical model law, available here) supplies the template most states use: licensing, disclosures, escrow, rescission, privacy, and reporting.
Non-correlated asset. An investment whose returns move independently of stocks and bonds. Life settlements qualify because returns depend on mortality experience — the property that attracts institutional capital, per how investors make money.
Owner (policy owner). The person or entity with legal rights over the policy — to name beneficiaries, borrow, surrender, or sell. Often but not always the insured; only the owner can settle a policy.
Policy loan. Borrowing against cash value. Outstanding loans reduce the net death benefit and are netted out of settlement pricing.
Premium. The payment keeping coverage in force. After a settlement, all premium obligations pass to the buyer.
Premium finance. Lending arrangements that fund premiums; historically intertwined with STOLI abuses when used to originate policies for resale, and scrutinized by buyers accordingly.
Provider (life settlement provider). The state-licensed company that purchases policies from owners — the regulated counterparty on every legitimate settlement contract, acting for institutional capital as described in who buys life insurance policies.
R-S: From Rescission to Survival Curves
Rescission period. The state-mandated window after closing — generally 15-30 days depending on the state — during which the seller may cancel the settlement and return the proceeds. A genuine legal undo button; confirm your state’s version before signing.
Retained death benefit. A transaction structure in which the seller receives no (or reduced) cash but keeps a portion of the death benefit for heirs, with the buyer paying all future premiums. An increasingly common alternative worth asking about.
Rev. Rul. 2009-13. The IRS revenue ruling establishing the three-tier tax treatment of settlement proceeds: recovery of premium basis tax-free, ordinary income up to the policy’s internal gain, capital gain above that — with basis rules improved for sellers by the 2017 Tax Cuts and Jobs Act. Details at the IRS and in the tax treatment guide.
Seasoning requirement. The rule that a policy generally must be in force 2+ years (5 in some states) before it may be settled — the structural anti-STOLI defense.
Secondary market. The market where original owners sell policies to providers. Distinct from the primary market (carrier issues policy) and the tertiary market (institutions trade among themselves) — mapped in secondary market life insurance.
STOLI (stranger-originated life insurance). Policies originated as investor wagers on strangers’ lives, violating insurable interest rules. Prohibited by statute; screened for by every legitimate buyer.
Survival curve. The month-by-month probability that the insured remains living — the full statistical object pricing models consume, of which the LE number is only the median.
T-V: From Tertiary Markets to Viaticals
Tertiary market. The institution-to-institution market where settled policies and whole portfolios trade among funds. Consumers never participate directly, but tertiary liquidity lets buyers bid more aggressively in the secondary market, indirectly supporting seller prices.
Tracking (status verification). The servicing practice of periodically confirming the insured’s status after a settlement — bounded in frequency and manner by state law, and handled administratively by servicing companies.
Underwriting (settlement context). The records-based medical analysis producing life expectancy estimates. No exams, no interviews — the paper-driven process detailed in life expectancy assessments.
Universal life (UL). Flexible-premium permanent insurance whose internal costs rise with age; the most commonly settled policy type, because premium escalation is what makes coverage unaffordable precisely when it becomes valuable to the market. Guaranteed UL (GUL), with fixed premiums, is especially prized by buyers.
Viatical settlement. The sale of a policy by a terminally or chronically ill insured — the market’s origin during the AIDS crisis, still governed by distinct rules and often distinct tax treatment. The full story appears in the viatical settlement complete guide and the market’s evolution in the history of life settlements.
Verification of coverage (VOC). The carrier-issued confirmation of a policy’s status, values, and beneficiary arrangements that buyers require during diligence.
Two structural terms complete the alphabet in spirit: the GAO report (GAO-10-775), the 2010 federal study documenting consumer outcomes and recommending uniform protections, and face-value ranges — the empirical reality that settlements typically pay 10-35% of face value across a 60-120 day process.
How to Use This Vocabulary in a Real Transaction
Definitions matter most at the moments you deploy them. A short field guide:
- Reading an offer letter. Identify the gross bid, then subtract disclosed broker compensation and any costs to reach net proceeds — and remember the offer is a DCF output built on LE reports and a discount rate, so ask which reports and how they were combined.
- Reviewing a contract. Locate the escrow terms, the rescission period for your state, and the exact moment ownership and beneficiary designation change. Confirm the provider’s license with your insurance department.
- Screening yourself. Check the qualification vocabulary: insured age generally 65+, face value generally $100,000+, policy past its seasoning requirement, premiums not consuming the benefit — the criteria in who qualifies for a life settlement.
- Comparing alternatives. Weigh the bid against cash surrender value, an accelerated death benefit rider, a policy loan, a retained death benefit structure, or simply keeping coverage — the full decision matrix in the complete guide to understanding life settlements.
- Planning the proceeds. Apply Rev. Rul. 2009-13 with a tax professional, and if you receive means-tested benefits, check eligibility effects before funds arrive.
Jargon is leverage in this market: the party who understands the vocabulary controls the questions, and the questions control the process. Keep this page open beside every document you are asked to sign, and treat any counterparty unwilling to define its terms — in writing, in plain English — as having answered a different question entirely.
Frequently Asked Questions
What is the difference between a life settlement broker and a life settlement provider?
A broker is a licensed intermediary who represents the policy owner, owes duties to the seller, and shops the policy to multiple providers to create competitive bidding; broker compensation must be disclosed under state law. A provider is the state-licensed company that actually purchases the policy, acting as principal for institutional capital. The practical difference: a provider gives you one buyer’s price, while a broker assembles several. Understanding which one you are talking to — and who they legally work for — is the first vocabulary test of any transaction.
What does cash surrender value mean and how is it different from face value?
Cash surrender value is what the insurance carrier pays if you cancel a permanent policy — the accumulated cash value minus any surrender charges. Face value is the death benefit the policy pays when the insured dies. The two can differ enormously: a $500,000 policy might have only $20,000 of surrender value. Life settlements exist in the gap — qualifying policies typically sell for 10-35% of face value, which usually works out to roughly 4-8 times the surrender value the carrier would have paid.
What is a life expectancy report in plain English?
It is a written estimate of how long the insured is likely to live, prepared by an independent medical underwriting firm from the insured’s health records — no exams involved. The report states a median life expectancy in months, a mortality multiplier comparing the insured to standard tables, and a month-by-month survival curve. Buyers customarily order two reports from separate firms, each taking about 2-6 weeks, and feed them into pricing models. A shorter estimated life expectancy generally produces a higher offer.
What does STOLI mean and why do buyers care about it?
STOLI stands for stranger-originated life insurance: policies created from the outset as investment vehicles for third parties, often by inducing seniors with cash or free-coverage promises. It violates the insurable interest requirement — the rule that whoever takes out a policy must genuinely have a stake in the insured’s life — and is prohibited by statute in most states. Buyers screen for STOLI because a tainted policy can be contested or voided. The screening explains the seasoning rule requiring policies to be in force generally two years before settling.
What is the rescission period in a life settlement contract?
It is the legally mandated window after closing — generally 15 to 30 days depending on your state — during which the seller can cancel the completed settlement, return the proceeds, and restore the policy to its prior ownership. It exists because selling a life insurance policy is a consequential, one-way decision, and state legislatures built in a cooling-off mechanism. Before signing any settlement contract, confirm the exact rescission terms for your state and how the mechanics of exercising it would work.
What is the tertiary market in life settlements?
The tertiary market is where institutions trade already-settled policies and entire portfolios among themselves — fund to fund, with no consumer involvement. It matters to sellers indirectly but meaningfully: buyers who know they can resell policies later are willing to pay more when bidding for newly settled policies in the secondary market, and tertiary price discovery feeds back into secondary offers. When people cite large market-size numbers, checking whether tertiary volume is included is one of the key statistical hygiene questions.
What does Rev. Rul. 2009-13 mean for someone selling a policy?
It is the IRS ruling that defines how settlement proceeds are taxed, using three tiers: amounts up to your premium basis are generally a tax-free return of capital; amounts from basis up to the policy’s cash surrender value are ordinary income; and anything above that is capital gain. The 2017 Tax Cuts and Jobs Act modified the basis calculation in sellers’ favor. The practical takeaway is that gross offers overstate what you keep, so alternatives should always be compared on an after-tax basis with professional advice.
What is the difference between a viatical settlement and a life settlement?
A viatical settlement is the sale of a policy by an insured who is terminally or chronically ill — the transaction type that launched the market during the AIDS crisis — while a life settlement is a sale by an insured who is typically 65 or older but not terminally ill. The distinction carries legal weight: many states regulate the two differently, and viatical proceeds can receive more favorable tax treatment. Modern market volume is overwhelmingly life settlements, but the viatical category persists for qualifying health situations.
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Related Reading
- What Is A Life Settlement
- Life Settlement Broker Vs Provider
- Life Settlement Tax Treatment Guide
- Secondary Market Life Insurance
- Viatical Settlement Complete Guide
Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.