Definition:Life settlement
💰 Life settlement is a transaction in which the owner of an existing life insurance policy sells that policy to a third-party investor for a lump sum that exceeds the policy's cash surrender value but is less than the death benefit. Within the insurance industry, life settlements have created a secondary market for life policies, giving policyholders — typically seniors who no longer need or can afford their coverage — a financial alternative to simply lapsing or surrendering a policy.
⚙️ The mechanics begin when a policy owner, often through a licensed life settlement broker, submits the policy for evaluation by one or more life settlement providers. The provider assesses the insured's life expectancy, the policy's face amount, premium obligations, and the type of coverage to arrive at an offer price. Once the sale closes, the investor assumes ownership, continues paying premiums, and ultimately collects the death benefit when the insured passes away. The investor's return depends heavily on the accuracy of the life expectancy estimate — if the insured lives significantly longer than projected, the investor's carrying costs rise and returns diminish. Institutional investors, hedge funds, and specialized funds have become active participants in this market, sometimes securitizing pools of settled policies into tradeable instruments.
📜 Regulation of life settlements varies by state, with most jurisdictions requiring licensing of brokers and providers and imposing disclosure obligations designed to protect sellers. Several states mandate minimum holding periods before a policy can be settled, in part to combat stranger-originated life insurance schemes where policies are purchased from inception with the intent to sell. For the life insurance industry more broadly, the settlement market introduces complexity: high settlement activity can disrupt a carrier's lapse rate assumptions, since policies that would otherwise have lapsed remain in force and eventually pay out claims. Despite these tensions, life settlements provide genuine economic value to policyholders who gain liquidity from an otherwise illiquid asset.
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