Realized Loss

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Definition / Meaning of

Life Settlement

Categories: Insurance,

If you are over age 70 and no longer need your life insurance policy, you may be able to sell it to a third party in what's called a life settlement. You're paid a cash amount less than the death benefit but typically greater than the surrender value, and the party that buys your policy will get the death benefit when you die. Similar to viatical settlements, in which terminally ill people may sell their life insurance policies, generally to use the cash to pay for healthcare, life settlements let you forgo a death benefit and use the cash in your policy while you're alive. However, life settlements are for people who are healthy and expect to live more than a couple of years. Specific rules for life settlements are set by the state where a specific transaction takes place.Some businesses specialize in buying life insurance policies from older or terminally ill individuals and reselling them as investments. However, because these insurance arrangements are controversial and most investors understand them poorly, both people considering selling policies and people considering investing in them are advised to proceed with caution. For example, there may be complex estate-planning and tax consequences to life settlements.