What is a life settlement in relation to a life insurance policy?

A life settlement refers to the transaction where a policyholder sells their existing life insurance policy to a third party for an amount that is greater than the policy's cash surrender value but less than the death benefit. This process often occurs when the policyholder no longer needs or can afford the policy, allowing them to receive immediate cash rather than waiting until the death benefit is paid out upon their passing.

This option is correct because it captures the essence of a life settlement—providing the seller with a financial benefit that is more advantageous than simply cashing in the policy while also recognizing that the buyer will receive the full death benefit when the insured person dies. This arrangement works well for both parties: the seller receives cash while the buyer secures an asset with potential future value.

Understanding this concept is important, particularly in contexts where individuals face changing financial situations or health-related issues. In contrast, other options either misrepresent the nature of the transaction or only focus on aspects like cash surrender values or policy termination due to non-payment, which do not apply to life settlements.