Introduction

Life insurance is typically purchased as long-term financial protection. It is designed to provide a death benefit to beneficiaries, support estate planning, protect business interests, or provide family security.

But life circumstances change. Premiums may increase. Estate strategies evolve. Business obligations dissolve. Retirement income needs expand. Long-term care expenses emerge.

In certain situations, policyholders discover that a life insurance policy may have value beyond surrendering it or allowing it to lapse. One option that may be available in specific circumstances is a life settlement.

This guide provides a comprehensive, educational overview of life settlements — including how they work, who may qualify, how they are regulated, tax considerations, risks, alternatives, and what to evaluate before making a decision.

This content is provided for educational purposes only and does not constitute legal, tax, financial, or medical advice.

What Is a Life Settlement?

A life settlement is a regulated financial transaction in which a policyholder sells an existing life insurance policy to a licensed third party in exchange for a lump-sum payment.

The payment is typically:

• Greater than the policy’s cash surrender value
• Less than the full death benefit

After the transaction:

• The buyer becomes the new policy owner
• The buyer becomes the beneficiary
• The buyer assumes responsibility for future premium payments
• The buyer ultimately receives the death benefit when the insured passes away

The National Association of Insurance Commissioners (NAIC) defines a life settlement as:

“The sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than the net death benefit.” — NAIC Life Settlements Model Act

You can read the NAIC Life Settlements Model Act here.

Why Do Life Settlements Exist?

Life settlements emerged through the development of the secondary market for life insurance. Historically, policyholders who no longer needed coverage had limited options:

• Continue paying premiums
• Surrender the policy to the insurer
• Allow the policy to lapse

The secondary market introduced another possibility: transferring ownership to a licensed buyer.

The legal foundation for policy transferability dates back to Grigsby v. Russell, 222 U.S. 149 (1911), in which the U.S. Supreme Court affirmed that life insurance policies are assignable property interests. You can view the official case reference here.

However, recognizing assignability does not imply universal suitability. Not every policy qualifies. Not every situation warrants exploring this option.

The Economic Foundation of the Secondary Market

Institutional buyers evaluate policies using actuarial modeling, life expectancy assessments, and premium projections to determine potential economic viability. Transactions are structured based on projected mortality tables and expected internal rates of return.

In simplified terms, buyers assess:

• The insured’s life expectancy
• Future premium obligations
• The time horizon until expected maturity
• The projected return relative to risk

Policies are often purchased as part of diversified portfolios rather than isolated transactions. This actuarial foundation distinguishes regulated life settlements from informal or unstructured policy transfers. Understanding that the option exists is different from assuming it is appropriate.

How the Life Settlement Process Works

While procedures vary by state and transaction type, the process generally includes the following stages:

1. Initial Policy Review

Basic information is reviewed, including:

• Policy type (whole, universal, variable, convertible term)
• Face amount
• Premium structure
• Age of insured
• General health indicators

This stage determines whether further evaluation may be appropriate. There is typically no obligation to proceed.

Read More: How the Life Settlement Process Works

2. Underwriting and Documentation

If proceeding, licensed professionals may request full policy documents, in-force illustrations, premium history, and medical records (with written HIPAA authorization).

Underwriting evaluates life expectancy and policy economics. Medical information is handled under privacy requirements imposed by state insurance law and regulatory safeguards.

3. Offer Presentation

If a licensed life settlement provider expresses interest, an offer may be presented. The policyholder may accept, decline, request clarification, or choose not to proceed. There is no requirement to accept any offer.

4. Closing and Rescission Period

If accepted, ownership transfers, beneficiary rights change, and funds are disbursed. Most states require a rescission period, typically 15–30 days, during which the seller may cancel the transaction and recover the policy.

Who Typically Qualifies for a Life Settlement?

Eligibility varies widely. However, qualification often depends on:

• Age (often 65+)
• Health status
• Policy type (permanent policies more common)
• Face amount (larger policies often preferred)
• Premium affordability
• Policy duration

Convertible term policies may qualify if converted to permanent coverage. Each case is reviewed individually. Qualification is not guaranteed.

Read More: Who Qualifies for a Life Settlement?

Types of Policies That May Qualify

Life settlements most commonly involve:

• Universal life
• Whole life
• Variable life

In some circumstances, convertible