What is a Life Settlement?

People can sell their life insurance policies to a third party for less than the face value of the policy. The third party hopes to profit by collecting the proceeds when the covered person passes away. Typical sellers are retired people who decide the cash settlement will be more useful now, while they live, than it will be to their heirs when they pass away.

For example, a policy owner could have a million dollar whole life insurance policy. Assume the policy has a cash value of $100,000. A third party may offer half a million dollars to buy the policy.

Of course, that amount is considerably more than the amount the covered person could cash his or her policy into the insurance company for. But it is still less than the third party would collect upon the policy owner’s death. In addition, the purchaser would continue to pay the premiums. If the policy owner can use the money for retirement expenses, and also be relieved of paying a premium every month, this may be a reasonable transaction.