DEFINITION of 'Life Settlement'

The selling of one's life insurance policy to a third party for a one time cash payment. The purchaser then becomes the beneficiary of the policy and begins paying the premiums. Typically the purchaser is an experienced institutional investor, and policies will have face amounts in excess of $250,000.

A life settlement is similar to a "viatical settlement".

BREAKING DOWN 'Life Settlement'

Life settlements are usually only done when the insured person doesn't have a known life-threatening illness. They are often done with "key individual" insurance policies held by companies on executives who no longer work there; the company has a chance to cash out on a policy that was previously illiquid.

Sometimes people outgrow their need for a specific life insurance policy, and a life settlement may offer the chance to gain more than the policy's cash surrender value.

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