Life settlements offer cash option for clients dropping coverage

Financial advisors are reviewing life settlements for clients who no longer need life insurance. Data from the Life Insurance Settlement Association showed that settlements averaged 8.71 times a policy’s cash surrender value in 2025.

A life settlement lets a policyholder sell an unwanted policy to a third party for a payment during the policyholder’s lifetime. The buyer assumes responsibility for future premiums and receives the death benefit after the insured dies. A policyholder who lets coverage lapse or accepts the surrender value may receive less than through a settlement.

A client’s reason for buying coverage may change over time. For example, a policy purchased during a marriage may no longer serve the same purpose after a divorce. A client who bought insurance to provide heirs with liquidity after owning real estate may also reconsider the policy after selling those assets. Longer life expectancies, inflation and changes in tax law can affect the decision.

“With a good advisor … many people would not allow it to lapse. There are a lot of other options available to them, but that does happen on occasion,” said Jason Stephens, founder and managing partner of Evertern Wealth, a registered investment advisor in Naples, Florida.

Age and health are among the factors that affect whether a client may qualify for a settlement. Settlements may be an option for clients in their 70s or 80s or for those with a serious health condition. The policy’s type, size, premiums and remaining benefits also affect the transaction.

The policy’s ownership structure may require additional review. If the policy is held in an irrevocable trust, trustees, including a client’s children in some cases, may need to participate in the decision. A client should also check whether the policy includes a long-term-care insurance rider. Selling the policy could remove that coverage from the client’s financial plan.

A policyholder may choose a partial settlement instead of selling the entire policy. Matthew Smart, chief investment officer at Chicago-based WWM Investments, described one arrangement in which a settlement company becomes the beneficiary of 50% of the death benefit while the policyholder retains the rest of the coverage.

“If you give up that policy, you have now removed that part of your planning from your life,” Smart said. “You have to be willing to drop your previous financial plan that the life insurance policy was a tool inside of. … You have to be willing to drop that tool to get cash now.”

A settlement can affect coverage, riders and estate planning. Clients should consult a tax advisor before proceeding. The tax treatment depends on the facts of the transaction and the client’s health. In some cases, proceeds may be untaxable because of the client’s health condition.

Bryan Nicholson, executive director of the Life Insurance Settlement Association, said the organization has advocated making life settlement proceeds tax-free. That policy has not been adopted broadly. Proceeds may be used for expenses such as long-term care and health care, subject to applicable tax rules.