Life Settlements FAQs

If you're considering a life settlement, you probably have questions. There's a lot to consider, from the potential benefits to the possible pitfalls. Discover the answers to some of the most common questions and make a decision fit for your lifestyle.

Written by
Lindsey Crossmier
Lindsey Crossmier
Financial Writer
Lindsey Crossmier is an accomplished writer with experience working for The Florida Review and Bookstar PR. As a financial writer, she covers Medicare, life insurance and dental insurance topics for RetireGuide. Research-based data drives her work.
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Edited By
Lamia Chowdhury
Lamia Chowdhury
Financial Editor
Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.
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Financially Reviewed By
Stephen Kates, CFP®
Stephen Kates, CFP®
Principal Financial Analyst for RetireGuide.com
Stephen Kates is a Certified Financial Planner™ professional and personal finance expert with over a decade of experience working with individuals and families who need help with their finances. With experience as a financial advisor for two of the largest financial firms in the country, Stephen has worked with hundreds of clients to build comprehensive financial plans to grow and protect their wealth.
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Published: December 12, 2022
Updated: May 26, 2023
6 min read time
This page features 3 Cited Research Articles

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Life Settlements and Key Terms Explained

What is a life settlement?

A life settlement is a financial transaction in which you sell your life insurance policy to a third party in exchange for a lump-sum payment. The buyer becomes the new owner of the policy, paying future premiums and collecting the death benefit.

What is the death benefit of a life insurance policy?

The death benefit is the payment your life insurer makes to the beneficiary of your policy when you die. It is the face value of your policy. If your life insurance has a $100,000 face value, for instance, the death benefit of your policy is $100,000.

What is the cash surrender value of a life insurance policy?

Permanent life insurance policies accrue cash savings over time. If you cancel your policy, your insurance must pay you a portion or all of that cash. That payment is known as the cash surrender value. It changes over time as your policy matures.

How is life expectancy calculated?

Underwriters examine factors specific to you, like your sex, age, current health and medical history, then compare the results against a similar group of like individuals to calculate your life expectancy.

What is the difference between a life settlement vs. a viatical settlement?

Both life and viatical settlements involve selling your life insurance policy to a third party for an immediate lump-sum payment. The major difference between the two is the health of the policyholder. With viatical settlements, you must be certified as either terminally ill (with a life expectancy of 24 months or less) or chronically ill (unable to perform at least two daily tasks, like eating or bathing, without help). There is no age restriction on viatical settlements.

Are there other options available besides selling a life insurance policy?

If you don’t want to sell your life insurance policy to a third party, you might consider:

Surrendering your policy back to your insurance carriers and claiming the built-up cash value
Obtaining a loan from your insurance company using your policy as collateral
Adding an accelerated death benefit rider to your policy
Having your beneficiaries pay the premiums

How Life Settlements Work

Who is eligible for a life settlement?

Broadly speaking, you are eligible for a life settlement if you are over 65 and have held a life insurance policy worth at least $100,000 for two years. However, state regulations vary: some states start eligibility at 70, while others require policies to be active for five years. The Life Insurance Settlement Association (LISA) keeps track of the requirements for each state.

What types of policies qualify for a life settlement?

All policy types may qualify: term, whole life, adjustable or universal life. Some types of group policies might also qualify.

Does your policy’s face value have to be a certain amount?

In most states, your policy must have a minimum face value of $100,000.

Are life settlements regulated?

Life settlements are regulated at the state level by the Department of Insurance. Many states have used model acts from the National Council of Insurance Legislators as the basis for their own legislation.

Why are life settlements considered investments?

Companies who purchase life insurance policies invest a set amount of money now (your settlement) in the hopes of earning a larger amount later (the death benefit of your policy). Essentially, they are betting on when they can claim the death benefit. The sooner they do, the better their investment.

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Selling Your Life Settlement

How is the value of your life insurance policy determined?

The value of your life insurance policy is the death benefit. Your settlement will usually be somewhere between 10-35% of the face value.

Can you sell only a portion of your life insurance policy?

Yes, you can sell only a portion of your policy, provided that portion meets the requirements of the third-party buyer.

Who do you talk to about selling your life insurance policy?

Start by talking to a trusted financial or tax advisor that knows the particulars of your life and situation and can give you unbiased advice or information. That advisor may be able to suggest a life settlement broker or company who can help you take the next steps.

What is a life settlement company?

A life settlement company buys insurance policies. They may be an insurance company, an investment company or some other type of organization. They will subtract any fees and expenses from the settlement amount.

Will you still owe premiums after selling your policy?

No. When you sell your life insurance policy, the new owner assumes all premiums going forward. They also collect the death benefit.

Can you sell multiple life insurance policies?

You may be able to sell more than one policy, depending on your circumstance and the value of those policies. Each sale would have to go through the full health condition reporting and underwriting process.

Who does a life settlement broker represent?

A life settlement broker represents you and works to find you the best deal possible. A broker will charge a commission on the sale, which will be taken out of the settlement in escrow.

How long does the selling process take?

In order to sell your policy, you have to submit personal and health information, which then has to be confirmed for the underwriters. The whole process can take somewhere between two to four months.

What Happens After You Sell a Life Insurance Policy

Will your private information be protected?

Your private financial and health information will be shared only so far as is required to complete the process. State legislation requires insurance companies to maintain a high level of privacy and security.

Will you have to pay any fees for a life settlement?

There will be a commission and expenses owed to a broker if you use one, and to the life settlement company. Those fees should be paid out of the settlement itself while it is in escrow, rather than paid out of pocket.

How are life settlements taxed?

Your settlement will generally be taxed either as ordinary income or as capital gains, depending on your income and circumstances. The IRS outlines the tax implications of different settlements as an example. Consult with a tax advisor who knows your specific situation.

What are some ways a policyholder can use proceeds from a life settlement?

The best part about a life settlement is that there are no restrictions on how you can use it. You might want the money to pursue medical treatment, to make needed renovations or to pay off a mortgage. You might use the money to defray ordinary expenses or to travel to a bucket list destination. You can use the proceeds as you see fit.

Last Modified: May 26, 2023

Lindsey Crossmier Financial Writer

Lindsey Crossmier joined the RetireGuide team in 2022 as a writer to promote long-lasting financial literacy. She leverages her creative writing background, editorial experience and financial education from Yale to write retirement-focused financial content for those ready to prepare for their futures. Making complex information simple and accessible for all is her specialty.

Special focus on content about life insurance, Social Security, Medicare and certificates of deposits (CDs)
Research-based data drives her work
Bachelor’s degree in English from the University of Central Florida

Edited By

Lamia Chowdhury Financial Editor

Financially Reviewed By

Stephen Kates, CFP® Principal Financial Analyst for RetireGuide.com

3 Cited Research Articles

Life Insurance Settlement Association. (2021). Search Results for: State Requirements. Retrieved from https://www.lisa.org/?s=state+requirements
National Council of Insurance Legislators. (2019, March 17). Life Settlements Model Act. Retrieved from Life-Settlements-Model-2019-Readoption.pdf (secureserver.net)
Internal Revenue Service. (2017, September 23). Internal Revenue Bulletin: 2009-21. Retrieved from https://www.irs.gov/irb/2009-21_IRB#RR-2009-13