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Most people purchase a life insurance policy so their loved ones are taken care of when they die. But what if you wanted to cash in on that policy while you're still alive, to pay for necessities now? That's the idea behind life settlements, a financial strategy that's gaining traction with seniors.

It works like this: you sell your life insurance policy to a third party, receiving more than the cash surrender value (CSV) that you would get if you simply canceled the policy. The third party - generally a life settlement provider - assumes ownership over the policy and any payments until you die, at which time they receive the payout as if they're the beneficiary.

According to data from the Life Insurance Settlement Association (LISA), licensed members of their organization paid $601 million across 2,699 settlements in 2024, for an average of roughly $223,000 per settlement [1]. Those numbers are up from the previous two years, with the data showing that, overall, LISA member settlements total close to $3 billion since 2021.

The report adds that clients received $511 million more than what they would have had they accepted the CSV or let the insurance lapse.

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With an increasing number of American seniors facing financial difficulties - the National Council on Aging estimates that“80% of older adults are either financially struggling now or are at risk for economic insecurity in retirement” - the idea of securing a life settlement is an intriguing option [2].

But, is it too good to be true?

Why policyholders and investors opt for life settlements

Proponents of life settlements generally point to the same benefits of cashing out: freeing up money for anything from paying bills to funding long-term care, or simply cutting bait on expensive premiums or policies that they no longer need (or can't afford).

In addition, those who don't immediately need the full payout of the life settlement can either spend or invest the difference.

As for who can take advantage of a life settlement, the qualifications can vary by state or settlement provider. Forbes explains that, generally, life settlement providers require a person to be at least 65 years old, with a policy of at least $50,000 [3]. They add that the average life settlement age is 75. As well, investors prefer buying larger policies and taking on clients with shorter life expectancies - a somewhat crass but realistic element that allows for a bigger, and quicker, ROI.

Bryan Nicholson, LISA's executive director, told USA Today that it's mostly banks, hedge funds and insurance companies purchasing the life insurance policies, as they“offer predictable returns that are not tied to the stock market, making them attractive" [4].

It's also why investing in life settlements is becoming more popular. In an interview with Financier Worldwide magazine, Brian Forman, senior consulting actuary with Actuarial Risk Management, said he expects the life settlement market to“experience significant growth in 2025 and beyond,” buoyed by“higher interest rates, inflation and market volatility [that] make life settlements an attractive option for policyholders and investors” [5].

Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you'll need a substantial stash of savings in retirement

Potential life settlement pitfalls

While life settlements sound like a solid proposition for those who no longer need their life insurance policy - or simply need the cash infusion more - there are important caveats to consider.

First and foremost, while the life settlement payout amounts to more than the CSV, the policyholder does not receive the full death benefit amount. Life settlements only pay a percentage of that number.

For instance, Life Settlement Advisors estimates a payout of between 10% and 25% [6]. And, they note, the payout is subject to various factors, including“your age and health, as well as the type of insurance and the amount of time that has passed since the policy was purchased.”

This means that a $500,000 policy could net you a $125,000 life settlement payout, assuming a 25% rate. That's a far cry from the $223,000 average touted by LISA but, again, a bigger policy will likely lead to a larger return.

That said, the amount, whatever it is, will likely be whittled down further by various fees and commissions related to the settlement process.

As well, the Financial Industry Regulatory Authority (FINRA) warns that a life settlement can be taxable and could affect your ability to receive assistance from Medicaid and other public programs [7]. And if you're in debt, creditors could claim a portion, or all, of the life settlement.

Lighthouse Life, which advocates for seniors to receive life settlements, also advises that taking one might make it harder to apply for life insurance again if you want to do so in the future [8].

Alternatives to life settlements

Life settlements, like any major financial decision, come with risks and rewards. And while a financial advisor can help you assess if it's the right move for you based on your own needs and life insurance policy, experts also suggest a few alternatives.

To start, you could go halfway and opt for a Retained Death Benefit (RDB) - by which you only sell a portion of your life insurance while keeping some of it for your beneficiaries. That way, if the idea of a life settlement works for you financially, you can have the best of both worlds: a payout for you, but also money left over for your loved ones when you're gone.

If you need extra money and want to avoid the life settlement route, the National Association of Insurance Commissioners (NAIC) suggests exploring what cash value you can claim from your insurance policy [9].

They add that the cash value could also be used to help get a loan from the bank to make any pressing payments.

FINRA recommends looking into borrowing against your policy, along with exploring accelerated death benefits which, they say,“allow an individual with a long-term, catastrophic or terminal illness to receive benefits on their policy prior to dying.”

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[1]. Life Insurance Settlement Association.“2024 LISA Member's Annual Market Data Released”

[2]. National Council on Aging.“Addressing the Nation's Retirement Crisis: The 80%”

[3]. Forbes.“What Are Life Settlements? Pros, Cons & How They Work”

[4]. USA Today.“Why you may not be worth more dead than alive if you own a life insurance policy”

[5]. Financier Worldwide.“Outlook for life settlement funds in 2025”

[6]. Life Settlement Advisors.“How Much Do Life Settlements Pay?”

[7]. Financial Industry Regulatory Authority.“What You Should Know About Life Settlements”

[8]. Lighthouse Life.“Pros and Cons of Selling Your Life Insurance Policy”

[9]. National Association of Insurance Commissioners.“Selling Your Life Insurance Policy: Understanding Life Settlements”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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