What is a life settlement?

A life settlement is a financial transaction in which the owner of a life insurance policy sells it to a third party—typically an institutional investor—for a lump-sum cash payment. This amount is more than the policy’s cash surrender value (on average, four times more than the CSV), but less than its death benefit. Once the policy is sold, the buyer becomes responsible for paying future premiums and will receive the death benefit when the insured passes away. Life settlements are most often pursued by individuals who no longer need or can afford their policies, or whose financial priorities have changed. They offer an alternative to surrendering a policy for little value or letting it lapse altogether.

Who qualifies for a life settlement?

Generally, individuals aged 65 or older with a life insurance policy of $100,000 or more are considered good candidates for a life settlement. However, younger individuals with significant health issues may also qualify, even if they are under 65. The type of policy also matters–universal life, whole life, term life (if convertible), and even group policies may be eligible. Factors like the insured’s life expectancy, the cost of future premiums, and the policy’s face value are all considered during the qualification process.

How can a life settlement help me?

A life settlement can offer financial relief and flexibility for policyowners who no longer need their coverage. The payout received can be used for a wide range of purposes, such as covering healthcare costs, supplementing retirement income, paying down debt, or simply improving overall quality of life. Many individuals choose this option when premiums become too costly or when the original reason for purchasing the policy no longer applies—such as after a spouse passes away, children become financially independent, or estate tax laws change.

How are life settlements taxed?

Life settlement proceeds can be subject to federal income tax, and how much is taxed depends on the policyowner’s cost basis (the amount they paid into the policy). Here’s how it typically breaks down:

• The portion of the proceeds up to the cost basis is tax-free.
• Any amount above the cost basis but below the policy’s cash surrender value is taxed as ordinary income.
• Proceeds above the surrender value are taxed as capital gains.

Life settlement proceeds can be subject to federal income tax, and how much is taxed depends on the policyowner’s cost basis (the amount they paid into the policy). Here’s how it typically breaks down:

• The portion of the proceeds up to the cost basis is tax-free.
• Any amount above the cost basis but below the policy’s cash surrender value is taxed as ordinary income.
• Proceeds above the surrender value are taxed as capital gains

Because tax treatment can vary based on individual circumstances, it’s important to consult a tax advisor before completing a life settlement transaction.

What is the difference between a life settlement and a viatical settlement?

While both life settlements and viatical settlements involve selling a life insurance policy to a third party, the key differences lies in the health condition of the insured. A viatical settlement is specifically for individuals who are terminally ill—typically with a life expectancy of 24 months or less. These transactions often carry different tax advantages and eligibility requirements. On the other hand, a life settlement is for policyowners who are not terminally ill, but may be older or in declining health. Viatical settlements are generally tax-free under federal law, while life settlements may be partially taxable depending on the amount received and the policyowner’s basis.

• Life Settlement: In a life settlement, the policyowner is typically someone who is older and has a life expectancy of more than two years. These individuals often have life insurance policies they no longer need or can afford, such as term life insurance or universal life insurance policies. They sell their policy to a third party for a lump sum payout, which is less than the death benefit of the policy but more than the cash surrender value.
• Viatical Settlement: Viatical settlements are specifically for individuals who are terminally ill, typically with a life expectancy of less than two years. These individuals may need funds to cover medical expenses, living expenses, or other financial needs. In a viatical settlement, the policyowner sells their life insurance policy to a third party for a lump sum, which is typically a percentage of the death benefit. The third party becomes the new beneficiary of the policy and collects the full death benefit when the insured individual passes away.
• In summary, the main difference lies in the health status of the policyowner: life settlements involve individuals with longer life expectancies, while viatical settlements involve individuals who are terminally ill.

What types of policies qualify for a life settlement?

Not all life insurance policies are eligible for a life settlement, but several types may qualify depending on the specifics of the policy, the age and health of the insured, and applicable state regulations. Here’s a breakdown of common policy types that may be eligible:

Several types of life insurance policies may qualify for a life settlement, including:

1. Term Life Insurance: Term life insurance provides coverage for a fixed period–typically 10, 20, or 30 years. While term policies generally expire with no value after the team ends, many include conversion riders that allow policyowners to convert the coverage into a permanent policy without undergoing a new medical exam. If the policy is convertible, it may become eligible for a life settlement once converted.
2. Universal Life Insurance: Universal life insurance offers flexible premium payments and adjustable death benefits. These policies also accumulate cash value over time, making them attractive candidates for life settlements. If the policyowner no longer needs coverage or wants to stop paying premiums, selling the policy can provide a significant cash payout.
3. Whole Life Insurance: Whole life policies offer lifetime coverage and build cash value consistently over time. Because of their long-term nature and built-in savings component, whole life insurance is often a strong contender for life settlements—especially if the insured’s circumstances have changed and the coverage is no longer necessary.
4. Convertible Life Insurance: Some term life policies come with a conversion option, allowing the policyowner to switch to a permanent policy without new underwriting. Once converted, these policies can be evaluated for a life settlement. This feature can be particularly valuable for policyowners who bought term insurance when younger and are now seeking a financial return on their investment.
5. Survivorship (or Second-to-Die) Life Insurance: Survivorship life insurance insures two people, typically spouses, and pays the death benefit only after both individuals have passed away. Although these policies are less commonly sold in life settlements, they may qualify—especially if one insured has passed and the surviving insured no longer needs the policy or faces declining health.

Ultimately, policy eligibility depends on various factors, including the face value (generally $100,000 or more), the insured’s age and health, and the terms of the policy itself. To find out if your policy qualifies, it’s wise to consult a licensed life settlement broker or financial advisor who can assess your situation and guide you through the process.

Who Is Investing In Life Settlements?

Life settlements have increasingly drawn the attention of a wide range of sophisticated investors. These include institutional investors, hedge funds, private equity firms, investment banks, pension funds, and high-net-worth individuals. While each may have different motivations, they are generally attracted by the unique characteristics life settlements offer as an alternative investment.

1. Portfolio Diversification: Life settlements are considered a non-correlated asset class, meaning their performance isn’t tied to traditional markets such as stocks, bonds, or real estate. This makes them a valuable tool for investors seeking to diversify their portfolios and minimize exposure to market-driven volatility.
2. Stable Returns: Returns on life settlements are generally driven by actuarial factors—primarily the life expectancy of the insured—not market performance. Because of this, they offer more consistent long-term returns, which can be particularly appealing during periods of economic uncertainty or downturns.
3. Low Volatility: Compared to other alternative investments like real estate or commodities, life settlements typically demonstrate lower volatility. Once a policy is purchased and held to maturity (i.e., the death of the insured), the payout is fixed, offering investors a predictable timeline and return structure.
4. Inflation Hedge: Since the death benefits from life insurance policies are fixed and often increase over time, investing in life settlements can act as a hedge against inflation. This feature helps investors preserve long-term purchasing power, which is especially important in high-inflation environments.
5. Socially Responsible Investing: Some investors are also drawn to life settlements for ethical reasons. Selling a life insurance policy can provide critical financial relief to seniors or individuals facing health challenges. In this way, investors see their capital not only generating returns but also serving a socially beneficial purpose.
6. Longevity Risk Mitigation: Insurance companies and pension funds—who are naturally exposed to longevity risk (i.e., individuals living longer than expected and drawing more benefits)—may invest in life settlements as a strategic counterbalance. These investments pay off sooner when individuals do not outlive expected mortality, helping to offset liabilities in other areas.
7. Tax Benefits: In certain jurisdictions, there may be favorable tax treatment for life settlement investments. This might include the classification of death benefits as tax-free or reduced capital gains taxes, depending on the structure of the investment and local regulations. Tax planning should always be conducted with a qualified advisor.

Despite the potential benefits, life settlements are not without risk. Uncertainty around life expectancy, regulatory changes, and the illiquid nature of these investments mean they’re best suited for sophisticated investors who can perform proper due diligence. Engaging with experienced brokers or asset managers specializing in life settlements is essential for mitigating these risks and evaluating true investment potential.

How long does the life settlement transaction process take?

The timeline for completing a life settlement can vary significantly, depending on the specifics of the policy and the responsiveness of all parties involved. On average, the process takes between 60 to 90 days, but it can be shorter or longer based on factors such as medical documentation delays, regulatory reviews, and negotiation length. Here’s a breakdown of each stage in the process:

1. Initial Inquiry: The process begins when a policyowner—or someone acting on their behalf, such as a financial advisor or family member—reaches out to a licensed life settlement provider or broker. During this initial phase, the policyowner provides basic information such as the type of life insurance policy, its face value, current premium obligations, and the insured’s general health status. This step helps the provider determine if the policy meets the initial criteria for consideration. Some providers may also conduct a quick, informal assessment based on this information before moving forward. This part of the process typically takes a few days.
2. Application and Documentation: If the policy meets preliminary qualifications, the next step involves completing a detailed application. The policyowner will be asked to submit several important documents, including a current copy of the life insurance policy, premium payment history, and medical records of the insured. A HIPAA release form will also be required to authorize the release of confidential health information. Delays can occur here, especially if medical records are spread across multiple healthcare providers or if policy documents are outdated or difficult to access. Gathering and submitting all the required paperwork can take anywhere from a few days to a few weeks, depending on how organized the policyowner is and how quickly medical records are released.
3. Underwriting and Evaluation: Once all documentation is in hand, the underwriting phase begins. During this step, the provider performs an in-depth review of the insured’s medical history to estimate life expectancy using actuarial models. This analysis helps determine the potential return on investment for buyers. At the same time, the policy itself is evaluated to understand its cash value (if any), premium schedule, and other contractual details. Independent life expectancy underwriters may be consulted to provide third-party assessments. Since accuracy is critical to establishing fair market value, this stage can take one to three weeks, depending on the case’s complexity.
4. Offer and Negotiation: After underwriting is complete, the life settlement provider or broker will make a formal offer to the policyowner. The initial offer reflects the provider’s valuation of the policy based on the insured’s life expectancy and the cost to maintain the policy until maturity. In some cases, especially when a broker is involved, multiple offers may be reviewed, allowing the policyowner to compare and negotiate better terms. These negotiations can involve discussions around price, future obligations, and any conditions of the sale. The negotiation phase typically takes several days to a couple of weeks, depending on how many parties are involved and how quickly decisions are made.
5. Approval and Closing: Once both sides agree to the terms, the transaction moves into the closing phase. Depending on the state where the policyowner resides, regulatory approval may be required. Life settlement regulations vary by state, and some jurisdictions require disclosures and waiting periods to ensure the policyowner fully understands the transaction. After meeting these compliance requirements, the closing paperwork is prepared. This includes transfer of ownership and beneficiary designation forms, settlement contracts, and other legal documents. Closing can take anywhere from one to three weeks, especially if regulatory sign-offs are required.
6. Funding and Settlement: Once all documents are signed and any required approvals are obtained, the settlement provider releases the funds. The policyowner receives a lump sum payment—typically via wire transfer or certified check—and the buyer becomes the new owner and beneficiary of the policy. From that point forward, the buyer is responsible for all future premium payments and will collect the death benefit upon the insured’s passing. This final stage of the process usually moves quickly and is typically completed within a few business days after closing.

While the entire life settlement process can vary, most transactions are completed within two to three months from start to finish. However, cases involving hard-to-access medical records, slow regulatory responses, or multiple rounds of negotiation may extend beyond 90 days. Working with a knowledgeable and experienced provider or broker can significantly improve efficiency and reduce unnecessary delays, helping policyowners access the funds they need sooner.