A policyholder sells their policy to a licensed buyer. The buyer continues paying premiums and receives the death benefit when the insured passes. The transaction created value for both the seller and the buyer through the transfer of risk and timing of cash flows.

Valuation is primarily driven by:

• Life expectancy of the insured
• Policy size (death benefit)
• Premium obligations
• Policy type and structure

These factors influence expected returns for the buyer.

Life settlements are typically available to individuals over age 65 or those with a change in health. Policies with larger face values (often $100,000+) are more likely to qualify, though each case depends on factors such as age, health, and policy type.

Life settlements typically involve permanent policies, such as:

• Universal life
• Whole life
• Convertible term policies

Eligibility depends on policy structure and underwriting factors.

The cash surrender value is the amount a policyholder would receive from the insurer if the policy is terminated early. Life settlements often provide a higher alternative value.

A viatical settlement is a subset of life settlements involving individuals with serious or life-threatening illnesses. These transactions typically result in higher payouts due to shorter life expectancy.

Life settlements are regulated at the state level in the U.S. Regulations typically require licensing for market participants and establish consumer protection standards.

Life settlements are taxed in 3 ways:

• Money received from a life settlement up to the tax basis is free of income tax.
• Money received that is greater than the tax basis, but less than the cash surrender value, is taxed at ordinary income rates.
• Money received that exceeds the cash value of your policy is taxed as capital gain.

The amount of taxable income is calculated by subtracting the total amount the participant has paid in premiums, their tax basis, and from the settlement amount.

Death benefit proceeds received by beneficiaries: 

Due to the death of the insured person, death benefit proceeds are not included in gross income and do not have to be reported. However, any interest you receive is taxable and should be reported as interest received. 

For more information on how life insurance proceeds are taxed, visit our Life Settlement Taxation page and the IRS.gov.

Clients can use the proceeds in a variety of ways, including supplementing retirement income, covering healthcare or long-term care costs, paying down debt, or reinvesting in other financial strategies.

Advisors should consider a life settlement when a client no longer needs or wants their policy, is struggling with premium payments, or is considering lapsing or surrendering coverage. It’s also worth evaluating during retirement planning, estate changes, or shifts in financial goals.