A guide to life settlements.

Understand what selling a life insurance policy means, compare other options, and prepare questions for your own advisers.

What you are selling

A life settlement is the sale of an existing life insurance policy to a third party. You receive a cash payment that is less than the policy's death benefit. The buyer becomes the new owner, pays future premiums, and receives the death benefit when the insured person dies.

The original beneficiaries no longer receive that benefit under the sold policy. The sale is not a loan against the policy and does not create new insurance coverage.

A viatical settlement generally involves a policy on someone with a terminal or chronic illness. Different rules and tax treatment may apply. Ask a qualified professional which type of transaction is being discussed.

How the process works

Start by contacting your insurer about the options in your current contract. If you consider a sale, confirm the role and required licenses of the people and companies involved with your state insurance department.

A provider is the company that purchases a policy. A broker may represent the policyowner and seek offers. Ask whom the professional represents, how offers are compared, and how compensation is paid.

A prospective buyer may review policy and medical information before making an offer. Review the proposed payment, fees, privacy terms, transfer arrangements, and any right to reconsider with your own advisers. A transaction is not guaranteed.

Find your state insurance department

Alternatives to a sale

A life settlement is not the only way to address an unwanted policy or a need for cash.

Keep or adjust your coverage

Your beneficiaries may still need the death benefit. Ask your insurer whether reducing coverage, changing premium arrangements, or another contract option would address your concerns. A change may have costs or reduce protection.

Ask about cash value and loans

Some policies let you access cash value or borrow against it. Charges, loan interest, taxes, and a reduced death benefit may apply. Availability depends on the contract; unpaid loans can affect coverage.

Ask about accelerated benefits

Some contracts allow an insured person with a qualifying serious illness to receive part of the death benefit while alive. Ask the insurer about the conditions, costs, and effect on the remaining benefit.

Understand surrendering or lapsing

Surrendering may return cash surrender value after charges. Allowing a policy to lapse can end coverage without a payment. Before changing or stopping premiums, ask the insurer to explain the consequences.

Risks and trade-offs

Consider the lasting effects of a sale alongside the proposed cash payment.

Family protection and future insurance

The original beneficiaries lose the sold policy's death benefit. Your age, health, and the policy still being in force with a buyer may affect your ability to get replacement coverage.

Taxes, benefits, and creditors

Settlement proceeds may be taxable. A payment can affect public assistance and may be subject to creditor claims. Get advice about your own tax, benefits, and legal circumstances.

Medical and personal information

Buyers and other parties may receive or share medical and personal information. Ask about confidentiality, resale of the policy, and requests for ongoing health updates.

Price, fees, and conflicts

An offer is not a guarantee that you are receiving the best available price. Ask about comparison shopping, all transaction costs, compensation, and whom each party represents.

Before you decide

Take these questions to your insurer, your own advisers, and any professional you are considering working with.

Do my beneficiaries still need the policy's death benefit?
What other options does my current insurance contract allow?
Whom does each professional represent, and are they licensed where required?
What would I receive after all costs, and how is everyone compensated?
What would happen to my taxes, public benefits, and future coverage?
Who can access my information now and if the policy is resold?
How will funds and the policy transfer be handled, including escrow?
Does my state give me a right to reconsider, and what are the requirements?

A sale may not be right for you. Do not let pressure or an advertised payment replace a review of your family's needs, alternatives, and the actual transaction terms.

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