Life settlement glossary

The life settlement industry has its own vocabulary. These definitions are written for policyholders, not industry professionals.

Life settlement

The sale of a life insurance policy to a third-party buyer for more than its cash surrender value and less than its net death benefit. The buyer takes over premium payments and collects the death benefit when the insured passes.

Viatical settlement

A life settlement involving an insured who has been diagnosed with a terminal or chronic illness. Because the buyer expects to collect the death benefit sooner, viatical settlements typically return a higher percentage of the death benefit than standard life settlements. Proceeds are generally income-tax-free when the insured is terminally ill.

Death benefit

The amount the insurance company pays to the beneficiary when the insured dies. Also called the face amount or face value. This is the number buyers use to price a policy in the secondary market.

Cash surrender value (CSV)

The amount the insurance company will pay if the policyholder cancels the policy and surrenders it. The CSV is set by the insurer and reflects the policy's internal account value minus any surrender charges. It is typically much less than what the secondary market would pay.

Life expectancy (LE)

An estimate of how long the insured is expected to live, based on age, health, and medical history. Life expectancy estimates are prepared by specialized underwriters and are a primary input in how buyers price a policy.

Life settlement broker

A licensed professional who represents the policy owner in a life settlement transaction. The broker puts the policy in front of multiple buyers simultaneously, creating competition that typically produces a higher price than a direct sale to a single buyer. The broker is paid a commission from the sale proceeds.

Life settlement provider

A licensed entity that purchases life insurance policies directly, either to hold as an investment or to resell to institutional investors. Providers are the buyers in a life settlement transaction.

Accelerated death benefit (ADB)

A rider on some life insurance policies that allows the policyholder to receive a portion of the death benefit while still alive, typically upon diagnosis of a terminal illness. The ADB is paid by the insurance company and reduces the death benefit available to beneficiaries. It is not a sale of the policy.

In-force illustration

A projection prepared by the insurance company showing how a policy is expected to perform going forward, based on current assumptions about interest rates, cost of insurance, and premium payments. Policyholders can request an in-force illustration at any time. It is often the first document a broker will ask for.

Cost of insurance (COI)

The monthly charge deducted from a universal life policy's account value to pay for the death benefit coverage. The COI increases with age and is one of the primary reasons universal life premiums rise over time.

Contestability period

The first two years after a life insurance policy is issued, during which the insurer can contest a claim and potentially rescind the policy if it finds material misrepresentation in the application. Policies must be past the contestability period to qualify for a life settlement.

Irrevocable life insurance trust (ILIT)

A trust that owns a life insurance policy, keeping the death benefit outside the insured's taxable estate. ILITs were commonly used for estate tax planning. Changes in the estate tax exemption have made many ILITs unnecessary. The trustee — not the insured — has authority over the policy, including any decision to sell it.

Net death benefit

The death benefit minus any outstanding policy loans. This is the amount a buyer would actually collect, and it is the number used to calculate the settlement as a percentage of face value.

Secondary market

The market in which existing life insurance policies are bought and sold. The primary market is the sale of new policies by insurance companies. The secondary market is the resale of those policies by policyholders to third-party buyers.

Tertiary market

The market in which life settlement providers resell policies they have purchased to institutional investors. Most policyholders do not interact with the tertiary market directly.