Life Insurance Settlement Options

The sale of an existing life insurance policy to a third party is called a life settlement. There are several options to choose from when receiving a life insurance settlement, including lump-sum payments, annuities, fixed-amount settlements and more. Understanding the differences among the different alternatives can help you decide whether taking a life settlement is the right choice for you.

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  • Written By
    Christian Simmons, CEPF

    Christian Simmons, CEPF

    Financial Writer, Certified Educator in Personal Finance

    Christian Simmons is a financial writer who has worked professionally as a journalist since 2016. As an active member of the Association for Financial Counseling & Planning (AFCPE), Christian prides himself on his ability to break down complex financial topics in ways that readers can easily understand.

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  • Edited By
    Savannah Pittle
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    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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    Thomas J. Brock, CFA®, CPA
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    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting 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.

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  • Updated: August 27, 2023
  • 6 min read time
  • This page features 11 Cited Research Articles

Key Takeaways

  • You can receive a life insurance settlement as a lump sum, an annuity or through regular installment payments. 
  • Life settlement annuities deliver consistent monthly income and bolster your retirement income. 
  • Interest-only and interest-accumulation settlements provide long-term growth for your settlement funds. 
  • Fixed-period and fixed-amount settlements deliver income for a set period of time, or in set amounts. 

Settling Through a Lump-Sum Payment

There are different settlement options for a life insurance policy. Settling through a lump-sum payment is the most common form of life insurance settlement. If you choose to settle this way, you’ll receive a single, large payment for your life insurance policy. 

Lump-sum settlements work for people with immediate financial needs. They’re also great for those who want to grow their investment portfolio with an injection of quick cash to buy other assets.

Generally, taxes aren’t owed on a lump-sum life settlement. Whether the funds are taxed depends on your personal financial situation. Consult a financial advisor for more information on the tax implications of selling your life insurance policy. 

Here are the steps involved in settling through a lump sum payment. 

How To Settle Through a Lump-Sum Payment

  1. Assess your financial situation. Consider your current finances and your family’s future needs. Then evaluate whether it makes sense to sell the policy
  2. Find a life settlement company. These firms specialize in buying life insurance policies. They also employ brokers and other specialists to facilitate the transaction. 
  3. Review your offers. Your settlement company will present you with a list of offers to choose from. You probably will want to choose the highest one. 
  4. Accept an offer. Tell your life settlement company which offer you like best. The company will prepare a contract for you to sign and then execute the legal aspects of the sale. 
  5. Receive your payment. After the sale is completed, you’ll receive your lump-sum payment. 

A life insurance settlement can be a sensible way to generate some cash. However, before you sell your policy, make sure you no longer need the financial protection it offers. If feasible, consult with a fiduciary financial advisor to assess your liquidity needs and explore all available options.

Converting to an Annuity To Create Lifetime Income

Another choice you have is converting life insurance settlements into annuities. An annuity is a financial product that supplies guaranteed monthly payments over a set time period. You can consider a life annuity or a period certain annuity.

Life Annuity

A life annuity, or life-only settlement, is a life insurance settlement that offers guaranteed monthly payments for the rest of your life. The amount you receive depends on the cash value of the policy at the time of your settlement and your projected lifespan. The younger and healthier you are, the smaller your payments are likely to be.

Choosing a life annuity settlement locks up your money. You won’t be able to make unscheduled withdrawals from your settlement account. The upside is you’ll get your monthly payments even if your account balance drops to zero. 

Period Certain

A few life settlement companies offer period-certain annuities, which supply guaranteed income for a set number of years. If you die before that period ends, your payments transfer to the beneficiary named in your contract. 

Period certain annuities add a source of secure, predictable income to your retirement plan, especially if you’re worried you might die before you receive your full settlement amount. 

Most period certain life settlements span 10 to 20 years. You decide the length of the time when you negotiate your settlement contract. Your settlement principal amount gets divided by the number of months in your payment period to figure out your specific payment amount. 

For example, you might receive a period certain life settlement worth $100,000 with a term of 20 years (240 months). You would then receive approximately $417 a month for the next 240 months, not including adjustments for inflation.

Read More: Life Settlement FAQs

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Interest-Only vs. Interest-Accumulation Settlements

Interest-only settlements are another type of life settlement. Instead of receiving a lump sum for your policy, the money gets invested and gains interest. Your beneficiary then receives this interest in monthly installments. They can also withdraw funds from the principal. Make sure to understand whether your settlement includes fixed or variable interest. 

Interest-accumulation settlements also involve the investment of proceeds of your life settlement. However, instead of paying the interest out each month, these settlements add that interest to the principal, growing the fund. This option is common for those who are financially stable and looking to invest in an emergency fund. 

Each of these settlement options has pros and cons. 

What Are the Pros and Cons?

Interest-Only Settlements


  • Keeps your beneficiary from spending all your settlement funds at once
  • Can access the principal if needed


  • Payments are smaller than regular annuity payments

Interest-Accumulation Settlements


  • Principal will grow over time
  • Can serve as an emergency fund


  • No regular payments
  • Oversight is needed to ensure the funds are invested wisely

Fixed Period vs. Fixed Amount Settlements

Fixed-period settlements are arrangements in which settlement funds are paid out month by month over a set period. For example, a life settlement worth $120,000 might be broken up into $1,000 monthly payments over the next 10 years. 

Another option is a fixed-amount settlement. These offer a specific amount of money each month until the settlement funds run out. This payment amount can be adjusted based on your needs. It’s important to note that funds may be quickly depleted if the payment amount is too high.

Consider the different pros and cons of each type. 

What Are the Pros and Cons?

Fixed-Period Settlements


  • Offers reliable income over time


  • Provides no access to funds outside of regular monthly payments

Fixed-Amount Settlements


  • Offers consistent monthly payments
  • You can adjust the amount based on your needs


  • Funds may run out quickly if the monthly amount is too high

How To Tell Which Settlement Option Is Best for You

Only you can decide which life settlement option fits you best. Weigh all the variables before selling your payments.  

How To Choose the Right Settlement Option for You
Determine Your Financial Needs.
Figure out what your financial needs are. What do you need the money for? Would it be better to get your full payout now, or receive installment payments over time?
Consider Your Health and Life Expectancy.
Consider your health and life expectancy. If you have a lot of years ahead of you, a larger lump sum may be more beneficial to you than many small monthly payments. 
Consult With a Financial Advisor or Settlement Expert.
Consider consulting with a financial advisor or settlement expert. They’ll offer advice on matters like estate planning and minimizing taxes. 
Review the Terms of the Settlement.
Review the terms of the settlement and make sure you know exactly what you’re getting into before you sign the settlement contract. Also, find out if you are allowed to change your mind after a certain period of time after the settlement. If you have the ability and decide to back out, you’ll be required to pay back the funds you received as well as any premiums the buyer paid. 

Editor Malori Malone contributed to this article.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 27, 2023