What is a life settlement?

A life settlement refers to the transaction in which a policyholder sells their life insurance policy to a third party for an amount that exceeds its cash surrender value. This means that the policyholder receives a lump sum payout, which is typically higher than what they would receive if they simply surrendered the policy back to the insurance company. The third party takes over the premium payments and becomes the beneficiary of the policy, ultimately receiving the death benefit when the insured passes away.

This financial arrangement has become a viable option for policyholders who may no longer need their life insurance or who are seeking immediate cash for various reasons. It provides an alternative to letting the policy lapse or surrendering it for a cash value that might be less than what they could receive in a life settlement.

The other options do not accurately describe what a life settlement is. Allowing a policy to lapse does not involve any financial benefit to the policyholder. Transferring the policy to a family member typically does not involve a cash transaction and would not fit the definition of a life settlement. Finally, settling claims after the insured's death pertains to the beneficiaries receiving the death benefit, which is a separate concept from a life settlement transaction.