What is a life settlement?

A life settlement refers to a financial transaction in which a policyholder sells their existing life insurance policy to a third party for a lump sum cash payment. This typically occurs when the policyholder no longer needs or wants the coverage, or when they have become uninsurable and seek to access the policy's value. The third party then becomes the policy beneficiary, assuming the payment of premiums until the insured individual passes away, at which point they receive the death benefit. This arrangement can provide the seller with immediate cash, which can be particularly beneficial for senior policyholders needing funds for healthcare or other expenses.

The other options do not accurately describe a life settlement. Converting a group insurance policy to an individual one pertains to ownership changes rather than a sale of the policy for cash. An investment strategy may involve purchasing or managing policies but does not define a life settlement in itself. Avoiding life insurance taxes could relate to tax strategies surrounding insurance but does not encapsulate what a life settlement is.