Full Definition

A life settlement is the sale of an existing life insurance policy to a third-party buyer for more than the policy’s cash surrender value but less than the full death benefit. The buyer pays the remaining premiums and collects the death benefit when the insured person dies.

For seniors facing long-term care costs, a life settlement can convert an underperforming or unnecessary insurance asset into immediate cash. Policies with face values of $100,000 or more are generally considered by settlement companies. The seller receives a lump sum — typically 20–40% of the death benefit — that can then be used to pay for care.

A viatical settlement is a variant available to terminally ill individuals (life expectancy of 24 months or less), usually at a higher percentage of face value and with favorable tax treatment.

Texas regulates life settlements through the Texas Department of Insurance. Key considerations include: tax consequences (some proceeds may be taxable as income), Medicaid implications (the lump sum received counts as a countable asset), impact on beneficiaries who expected the death benefit, and the need to compare offers from multiple licensed buyers. Families should work with a licensed financial advisor and potentially an elder law attorney before completing a life settlement.