What is a life settlement?

A life settlement refers to the transaction where a policyholder sells their life insurance policy to a third party for a lump sum payment, which is typically more than the policy's cash surrender value but less than its death benefit. This arrangement allows the policyholder to access immediate cash, which can be used for various purposes such as medical expenses, retirement income, or other financial needs, especially if the policyholder no longer needs or can afford the policy.

In this context, it is an important financial option for individuals, particularly seniors, who may have changed circumstances that affect their insurance needs. The transaction usually involves a secondary market where investors purchase these policies, betting on the policyholder’s life expectancy to ultimately profit from the death benefit when the policy matures.

Other options provided do not capture the essence of a life settlement as accurately. The choice reflecting a loan against a life insurance policy indicates a different financial product. Temporary reductions in premiums do not pertain to selling a policy, nor does a type of policy that guarantees a payout after a certain age represent the mechanics or definition of a life settlement.