Life Insurance Settlement is a financial transaction in which a policy holder possessing an unneeded or unwanted life coverage policy sells the policy to a third party for more than the cash value offered by the insurance company. Through this settlement, the purchaser becomes the new beneficiary of the policy on maturity and is responsible for all subsequent premium payments. The insured person is paid a lump sum amount in cash for surrendering the policy.

The amount paid in such cases is based on the life expectancy of the insured person, amount insured and amount of premiums paid. No settlement can be made if the policy lapses before the designated term or before the minimum period of the policy existence.

The insurance policy can be prematurely surrendered to get the benefit of cash amount but with a loss of certain number of premiums or a percentage of amount from the amount paid in the form of premiums. This scheme allows the insurer to sell his existing policy to any financial institution in order to get an immediate monetary benefit in case of an emergency. The amount paid for the life policy represents the present day value of the policy.

Life insurance settlement is of two types:

1. Life Settlement - the policy holder can sell the existing policy to receive a percentage of the policy’s face value more than the surrender value. Due to the changing circumstances the policy holder can surrender the policy for cash value or let it lapse.
2. Viatical Settlement - this is applicable for those who are suffering from terminal illness. They get the present day value of their policy to meet the expenses of the high cost of medical treatment.

Life insurance settlement is an important development in that it has opened a secondary market for life insurance in which policy owners can access fair value for their policies, rather than accepting the lower cash surrender value from the issuing life insurance company.