What Is a Life Settlement?

A life settlement is the sale of an existing life insurance policy to a licensed third-party buyer. The buyer pays a lump sum, assumes the premium payments, and receives the death benefit when the insured passes away.

The amount paid almost always exceeds what the carrier would pay to surrender the policy. How much it exceeds that figure depends on how many buyers are bidding.

That distinction is the reason Windsor exists. Windsor does not buy policies. Windsor represents the policyowner, submits the policy to more than 30 licensed buyers, funds, and private investors, and requires them to compete. One policy, multiple offers.

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Most policyowners do not qualify.

The advertising in this industry can sometimes suggest otherwise. The eligibility standards are narrow.

A policy is likely to qualify when:

• The insured is 75 or older, or the insured's health has declined since the policy was issued.
• The face value is $100,000 or more.
• The policy is universal life, whole life, or convertible term.
• Premiums are current and the policy is transferable.

A policy is unlikely to qualify when the insured is healthy, under 75, and holds a small term policy with no conversion option. That describes the majority of visitors to this page. In that situation, keeping the coverage in force is almost always the better outcome.

Windsor addresses the eligibility question in full on a separate page: why most policies do not qualify.

Term policies, and the one exception.

Most life insurance in force is term coverage, which makes this the most common situation on this page.

Term policies generally cannot be sold. They expire before they would ever pay a death benefit, so there is nothing for a buyer to acquire.

The exception is conversion. A term policy with an active conversion rider can often be converted to permanent coverage and then sold. Conversion deadlines are strict, they vary by carrier, and they are easily missed. Confirming the deadline is the first step.

Windsor maintains a term policy calculator that requires no name, phone number, or email address. The accompanying guide covers conversion rights, deadlines, required documents, and carrier-specific rules.

For permanent coverage, the sections below apply.

What determines a policy's value.

Windsor does not publish an estimated payout range. Any figure quoted before underwriting is a guess.

Four factors set the value:

• The insured's age.
• The insured's health, confirmed by an independent medical underwriter.
• The cost of the premiums required to keep the policy in force.
• The face amount.

A buyer is solving for one variable: how long premiums must be paid before the policy pays out. The shorter that period, the higher the offer.

Investor demand moves as well. The same policy can be worth different amounts in different quarters, which is why an offer received several years ago is not a reliable guide to the current market.

Value is established by taking the policy to market. The Windsor life settlement calculator produces a starting estimate in about two minutes.

Who buys life insurance policies.

Policies are not purchased by individuals. They are purchased by institutional investors: funds, pension capital, and private investment firms that hold policies as long-term assets.

Much of the advertising in this category is misleading. Some companies offering cash for policies do not buy anything. They are marketing firms that sell contact information. Others are owned by a single fund, so every case is routed to one buyer. The result is a single offer with no benchmark against it.

One offer is not a market. It is a number.

Windsor submits each policy anonymously to its full buyer network. The buyers bid. Every offer is presented in writing, and the policyowner can withdraw at any point, including after offers have been received.

Windsor publishes a list of the major companies in the market, competitors included, identifying which ones purchase policies and which ones only advertise. See companies that buy life insurance policies.

Who represents the policyowner.

Two licensed roles exist in this transaction, and they answer to different parties.

A provider representative works for the buyer. That role exists to acquire policies at the lowest price the seller will accept. It is legitimate, and it is not aligned with the seller.

A life settlement broker works for the policyowner. In most states the broker owes the policyowner a fiduciary duty. That is a legal standard rather than a marketing claim. It requires the broker to place the policyowner's interests first, to disclose every offer received, and to refrain from directing a policy toward a particular buyer for the broker's own benefit.

Windsor is a broker and has represented policyowners as a fiduciary since 2012. Every offer is disclosed in writing, including offers Windsor recommends against. Commission is disclosed before any agreement is signed and is paid out of the settlement proceeds.

How life settlement brokers work, including how commission is paid.

How the sale works, start to finish.

1. Policy review. Windsor evaluates policy type, face value, and premium status at no cost and with no obligation.
2. Medical underwriting. Independent underwriters review medical records and estimate life expectancy. Buyers price against that estimate.
3. Submission to market. The policy is submitted anonymously to the full buyer network.
4. Offers. Windsor presents every offer received, including the weak ones. The policyowner selects one or declines all of them.
5. Closing. Ownership transfers, the buyer assumes the premiums, and funds are released through a licensed escrow agent.

Most transactions close within four to six weeks. Delays are almost always caused by outstanding medical and policy records, so returning signed record requests promptly is the single largest factor in a faster close. More on shortening the timeline.

How proceeds are taxed.

The Tax Cuts and Jobs Act of 2017 resolved a long-standing ambiguity. Proceeds are taxed in three layers.

• Premiums paid are returned tax free.
• Proceeds above that basis, up to the policy's cash value, are taxed as ordinary income.
• Any remaining gain is taxed as a capital gain.

State treatment varies and individual circumstances differ. Windsor is a broker, not a tax advisor, and recommends review by a CPA before closing.

Full breakdown, with a worked example.

State law protections.

Life settlements are regulated at the state level, generally by each state's Department of Insurance. These rules exist because the early market had serious problems.

Most states require:

• Licensing. Both brokers and buyers must hold a state license.
• Written disclosure. Offers, fees, and commissions must be disclosed in writing before commitment.
• Escrow. Funds are held by a licensed third party rather than by the buyer.
• A right of rescission. A defined window after closing in which the sale can be unwound.

Requirements differ by state. State by state detail.

When a sale makes sense, and when it does not.

A sale generally makes sense when:

• Premiums have become a burden.
• The coverage is no longer needed, following circumstances such as grown children, a repaid mortgage, or the sale of a business.
• The policy is headed for lapse or surrender. Surrender is almost always the least favorable outcome available.
• Cash is needed for care, debt, or income, and the policy is the largest idle asset in the estate.

A sale generally does not make sense when:

• A beneficiary still depends on the death benefit. Once the policy is sold, that benefit is gone.
• Premiums remain affordable and there is no pressing use for the proceeds.
• The policy serves an active purpose, such as covering estate taxes or funding a buy-sell agreement.
• Pressure is being applied. No legitimate transaction requires a rushed decision.

A sale is permanent, and beneficiaries lose the death benefit. That trade is not always worth making.

Three questions to ask any company before moving forward.

Terminal and chronic illness are a different transaction.

A terminal or chronic illness places the transaction in the viatical settlement category rather than the life settlement category. Different rules apply, and they generally favor the seller.

• Age is not a factor. Health is.
• Proceeds are generally exempt from federal income tax.
• Payouts tend to be substantially higher, because the buyer's holding period is shorter.

Carriers frequently present an accelerated death benefit in these situations. Taking the policy to market before accepting that offer often produces a higher number. A recent case, with the offers documented.

Viatical settlement eligibility | How accelerated death benefits work