How Do Life Settlements Work?

If you own a life insurance policy that you no longer want or need, you can surrender the policy for its cash value or allow it to lapse. Life settlements present a third option: Sell your policy (or the right to receive the death benefit) to an entity other than the insurance company that issued the policy. That transaction is known as a life settlement.

The purchasers of life settlements, sometimes called life settlement companies or life settlement providers, generally are institutions that either hold the policies to maturity or resell policies—or sell interests in multiple, bundled policies—to hedge funds or other investors.

In exchange for your policy, you’ll receive a lump sum payment. The amount you’ll receive will depend on a range of factors, including your age, health, and policy terms and conditions. Such payments are generally more than the policy's cash surrender value (the amount you can collect if you cancel or "surrender" the policy before it matures or you die) and less than the net death benefit (the amount specified in the insurance policy or annuity contract, minus any unpaid premiums that are due and outstanding loan balances or other withdrawals).

In addition to paying a lump sum for your policy, the buyer agrees to pay any additional premiums that might be required to support the cost of the policy for as long as you live. In exchange, the buyer will receive the death benefit when you die.