Life Insurance Settlements

A life settlement involves selling your life insurance policy to a third party in exchange for cash. The buyer then takes on premium payments and receives the death benefit when the seller dies. Life settlements can be an advantageous option for those who can no longer afford their life insurance premiums or don’t need a policy anymore.

Elaine Silvestrini, Annuity.org Writer
  • Written By
    Elaine Silvestrini

    Elaine Silvestrini

    Financial Writer

    Elaine Silvestrini is an advocate for financial literacy who worked for more than 25 years in journalism before joining Annuity.org as a financial writer.

    Read More
  • Edited By
    Kim Borwick
    Kim Borwick, Financial Editor for Annuity.org

    Kim Borwick

    Financial Editor

    Kim Borwick is a writer and editor who studies financial literacy and retirement annuities. She has extensive experience with editing educational content and financial topics for Annuity.org.

    Read More
  • Financially Reviewed By
    Thomas J. Brock, CFA®, CPA
    Thomas Brock, CFA, CPA, expert contributor to Annuity.org

    Thomas J. Brock, CFA®, CPA

    Investment Management and Finance Professional

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

    Read More
  • Updated: September 12, 2022
  • This page features 16 Cited Research Articles
Fact Checked
Fact Checked

Annuity.org partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Cite Us
How to Cite Annuity.org's Article

APA Silvestrini, E. (2022, September 12). Life Insurance Settlements. Annuity.org. Retrieved September 22, 2022, from https://www.annuity.org/selling-payments/life-insurance-settlements/

MLA Silvestrini, Elaine. "Life Insurance Settlements." Annuity.org, 12 Sep 2022, https://www.annuity.org/selling-payments/life-insurance-settlements/.

Chicago Silvestrini, Elaine. "Life Insurance Settlements." Annuity.org. Last modified September 12, 2022. https://www.annuity.org/selling-payments/life-insurance-settlements/.

What Is a Life Insurance Settlement?

In the most basic terms, a life settlement is a way for you to swap your current life insurance policy for immediate cash. Therefore, life settlements are often attractive to those who have unexpected expenses or some immediate need for money.

The process begins when the seller, who currently holds the policy, chooses a third party to sell it to. The third party then pays the seller a lump sum of cash for the policy and will go on to pay any future premiums on the policy. In exchange, when the seller dies, the third party receives the death benefit.

Seeking a life settlement is different from surrendering a life insurance policy for its cash value. Opting for the cash value involves only you and your life insurance provider. A life settlement includes a third party that buys the policy from you.

The goal of a life settlement can seem unnerving to some because the company or provider that is purchasing the policy is essentially looking to profit off the seller’s death. The sooner the seller dies after selling the policy, the more the third party stands to make.

For this reason, the cash you would receive from selling your policy will fall somewhere between the cash value of surrendering the policy and the death benefit.

The third party is incentivized to offer you more than the cash value, so that you sell the policy to them instead of surrendering it. However, they will typically offer less than the death benefit, so they can make a profit when you die.

How Life Settlements Work

When you have a policy and want to sell it in a life settlement, the older and sicker you are, the easier it will be for you to sell it, and the more money you’ll be able to get for it.

Pro Tip
Life insurance settlements can be a legitimate source of cash when the alternative is to let a life insurance policy lapse.

Eligibility

In general, candidates for life settlements are typically older than 65 and hold life insurance policies with death benefits higher than $100,000. Younger policyholders may qualify if they have certain serious health conditions. However, if you’re younger than 65 years old with no serious health problems, you’re unlikely to get a bid for more than the surrender value of the policy.

When you’re seeking a life settlement, you will have to fill out a lot of paperwork and share your medical records. The buyer will use this information, along with your race, gender, family medical history and lifestyle, to determine your life expectancy. You may even have to get a medical exam to qualify.

The Financial Industry Regulatory Authority (FINRA) says there are legitimate reasons for life settlements, as well as reasons to be wary.

“When you sell your life insurance policy, whoever buys it is acquiring a financial interest in your death,” FINRA cautions. This kind of transaction “may target seniors who may be in poor health. It can be prone to aggressive sales tactics and abuse,” FINRA says.

Regulation Handled by States

Life settlements are regulated at the state level, with 42 states and Puerto Rico having laws of varying degrees. That leaves eight states and the District of Columbia with no regulation on these transactions. Critics say this is inconsistent and confusing.

Most of the states that regulate life settlements require a minimum of two years between the purchase and sale of a life insurance policy. A total of ten states require five-year waits. Minnesota requires four years.

Most of these states grant exemptions from the waiting periods in specific circumstances, such as divorce, retirement or terminal illness.

Investing in Life Settlements

Life settlement companies often bundle policies into funds and sell interest from the funds to investors. Doing this mitigates the risk of individual, original policyholders outliving expectations.

This is another area in which abuse has occurred and risks can be high. One potential risk to investors is that insurance companies may refuse to pay benefits because of alleged problems with the policies. or the insurance companies may go bankrupt. Investing fees may be high and include large commissions for brokers.

In some cases, government regulators have sued life settlement companies, accusing them of misleading investors. For example, a California firm was accused by the Securities and Exchange Commission of hiding from investors that the insurance policyholders were living longer than expected.

Newsletter Icon
Join Thousands of Other Personal Finance Enthusiasts
Because missing out on important news and updates could cost you.

Why Sell Your Life Insurance Policy?

Every year, about 4.5% of life insurance policies in the United States are allowed to lapse. The owners of those policies simply stop paying the premiums and lose their financial interest in these policies, which equals to a loss of about $900 billion in benefits to policyholders annually.

There are several valid reasons someone might no longer need a life insurance policy. For example, maybe the beneficiary is deceased or no longer needs the support. Maybe the policy was purchased to provide for children who are now adults able to provide for themselves.

Perhaps the policyholder can’t afford it or just doesn’t want to make the payments. Also, he or she may need the cash to pay an unexpected expense or want to invest in a business.

Downsides and Cautions

Unlike life insurance proceeds inherited by your beneficiaries, the money you get in your life settlement will be subject to taxation. And it may affect whether you’re eligible to receive public assistance, such as Medicaid. These funds could also limit your ability to get another life insurance policy, should you need or want one, because it will count against the amount for which your life is insured.

FINRA says they can have high costs and unintended consequences. It’s tough to find out what a fair price would be for your policy.

You should do as much research as possible and ask a lot of questions about the fees, commissions, taxes and other costs. If you’re using a broker, you can look into his or her professional background using FINRA’s BrokerCheck.

FINRA also gives the following recommendations:
  • Study your life insurance policy so you completely understand what’s in it and what other options you have.
  • Research life settlements.
  • Compare offers from more than one potential buyer.
  • Deal only with licensed purchasers and brokers.
  • Check with your state insurance commissioner to see if your settlement company or broker is licensed and if there are complaints on record.
  • Ask what will ultimately happen to your policy and how your personal, medical information may be protected or exposed.

How Much Does a Life Settlement Pay?

How much a life settlement pays will depend on your personal situation and policy. The payout can vary heavily from person to person.

The older and sicker you are or the more valuable your policy is, the bigger your payout will likely be.

The goal of selling a life insurance policy is to get more than the policy’s cash value should the policyholder surrender it to the insurance company. However, this would be substantially less than the value of the death benefit. Typically, this would be about 10% to 25% of the policy benefit amount.

Pro Tip
The payout for a life settlement is likely to fall somewhere between the cash value of surrendering the policy and the death benefit.

Remember that the goal of the third party buying your policy is to make a profit from the transaction. The closer the payout is to the death benefit, the less money they stand to make when you die.

The settlement amount is likely to be further reduced by the costs of the transaction, including commissions and fees, as well as taxes due. However, each case is different, depending on several factors.

Whether you qualify to sell your policy and how much you can get for it are determined by your age, health status and the details of your life insurance policy, including the cost of the premiums.

Life Settlements vs Viatical Settlements

Life settlements share many similarities with viatical settlements. In both scenarios, the seller works to sell their life insurance policy to a third party, like a company or provider. In exchange, the seller receives a one-time lump-sum payment while the company receives the death benefit when the seller dies.

The main difference between the two types of settlements is who is eligible for each. Life settlements are generally only an option for those with valuable policies and who are already old. But the typical requirements for a viatical settlement are even more stringent.

Viatical settlements are exclusively for those who are terminally or chronically ill. The seller of the policy typically has a life expectancy of less than two years.

Part of what makes viatical settlements appealing to potential buyers is that the seller is likely to die very soon, resulting in a higher and faster return on investment.

Many of the reasons why someone may consider a life settlement apply to those considering a viatical settlement as well, but terminally ill sellers may have the extra motivation of needing the immediate cash to handle their medical expenses.

Another key difference between settlements is that, while life settlements can be taxed, viatical settlements are usually not taxable in most cases.

How Can I Protect Myself Against Fraud?

The first step to protecting yourself against fraud is to be fully aware of what a life settlement is. You are selling your policy to a third party for a lump-sum payment. That third party hopes to make a profit off receiving the death benefit when you die.

Understanding the process and the motivation of any buyer can help prevent you being taken advantage of or ending up in a bad situation.

Another key point to remember when looking to avoid fraud is being aware of state regulations. States often require a significant waiting period between when a policy was purchased and when it can be sold.

Any situation where you are acquiring a life insurance policy in order to sell it could be fraud.

You should also ensure that you are dealing with a legitimate third party. Verify that the company you are working with is in fact regulated and licensed in your state and has a legitimate track record.

Alternatives to Life Settlements

Before committing to a life settlement, it’s a good idea to make sure you understand all the costs and downsides. You should also explore whether other options might be better for your situation.

Other possibilities to examine:
  • See if you can get a loan against your policy value.
  • Cash out the policy to the insurance company for a reduced sum.
  • Pursue accelerated death benefits if you are terminally ill or have a long-term condition that qualifies. This allows you to receive policy benefits before you die.
  • Do a 1035 exchange to exchange one insurance policy for another without paying taxes on the gains on the first life insurance contract. This transaction is governed by Section 1035 of the Internal Revenue Code.
  • Ask your beneficiaries to cover the cost of your premium payments.
  • Ask your insurance company if the policy can be changed to eliminate premiums and lower the amount of the death benefit.
  • Consider donating the policy to a charity or community foundation. The Insuring a Better World Fund can help with that.
  • To raise cash, look into selling annuity payments.

As with all financial decisions, you must consider your personal needs and do your research before you sell your life insurance policy. For some, life settlements make sense, but for others, there are better options.

Frequently Asked Questions

Who qualifies for a life settlement?
To qualify for a life settlement, you must be interested in selling your life insurance policy and usually must be around 70 or older. Your policy also needs to be valuable enough to make a transaction worth it.
How long does a life settlement take?
There is no set amount of time for how long a life settlement takes. It will vary depending on your personal circumstances and situations. But it is not instantaneous, and you can expect it to take even a few months to be finalized.
Is a life settlement tax free?
Life settlements typically are not tax free. You may have to pay taxes on the lump sum you receive for selling your policy.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: September 12, 2022

16 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Kagan, J. (2022, May 25). Life Settlement. Retrieved from https://www.investopedia.com/terms/l/life_settlement.asp
  2. Bayston, D. (2019, February 6). 3 Life Settlement Trends to Watch In 2019. Retrieved from https://insurancenewsnet.com/innarticle/3-life-settlement-trends-to-watch-in-2019#.XGXVeTPYqUl
  3. Gibson, C. (2019, January 25). Why Life Settlements Will Continue To See Growth. Retrieved from https://insurancenewsnet.com/innarticle/why-life-settlements-will-continue-to-see-growth#.XGXXmTPYqUl
  4. Lowery, J. (2018, October 4). The Gay Men Who Have Lived for Years With Someone Waiting on Their Death. Retrieved from https://www.theatlantic.com/health/archive/2018/10/viatical-settlements-aids-gay-men/572044/
  5. Weinberger, R.S. & Katz, P.N. (2018, May 21). Life Settlement Prospects Are All Around You. Retrieved from https://www.thinkadvisor.com/2018/05/21/life-settlement-prospects-are-all-around-you/
  6. Hicks, C. (2017, October 17). The Morbid Niche of Life Settlement Funds. Retrieved from https://money.usnews.com/investing/funds/articles/2017-10-17/the-morbid-niche-of-life-settlement-funds
  7. Span, P. (2017, October 13.). Wringing Cash From Life Insurance. Retrieved from https://www.nytimes.com/2017/10/13/health/life-insurance-policy-settlements.html
  8. Holbrook, A. & Glover, L. (2017, January 6). Life Settlements: Selling Your Life Insurance Policy. Retrieved from https://www.nerdwallet.com/blog/insurance/considerations-when-selling-life-insurance-policy/
  9. Kitces, M. (2016, January 12). Life Settlements – Selling A Life Insurance Policy That’s No Longer Wanted For More Than Its Cash Value. Retrieved from https://www.kitces.com/blog/life-settlements-selling-a-life-insurance-policy-thats-no-longer-wanted-for-more-than-its-cash-value/
  10. Financial Industry Regulatory Authority. (2015, September 25). Selling Your Life Insurance Policy: Is Quick Cash Worth It? Retrieved from https://www.finra.org/investors/insights/selling-your-life-insurance-policy-quick-cash-worth-it
  11. Schoeff, M. (2015, April 8). SEC Goes After Firm for Fraud Tied to Life Settlements. Retrieved from https://www.investmentnews.com/sec-goes-after-firm-for-fraud-tied-to-life-settlements-61836
  12. U.S. Securities and Exchange Commission. (2011, January 1). Investor Bulletin on Life Settlements. Retrieved from https://www.sec.gov/investor/alerts/lifesettlements-bulletin.htm
  13. Government Accountability Office. (2010, July). Life Insurance Settlements: Regulatory Inconsistencies May Pose a Number of Challenges. Retrieved from https://www.gao.gov/assets/310/306974.pdf
  14. U.S. Supreme Court. (1911, November 10). Grigsby v. Russell. Retrieved from https://supreme.justia.com/cases/federal/us/222/149/
  15. Financial Industry Regulatory Authority. (n.d.). Seniors Beware: What You Should Know About Life Settlements. Retrieved from https://www.finra.org/investors/alerts/seniors-beware-what-you-should-know-about-life-settlements
  16. Life Insurance Settlement Association. (n.d.). History of Life Settlements in the US. Retrieved from https://web.archive.org/web/20200529060517/https://www.lisa.org/industry-resources/history-of-life-settlements-in-the-us