What is a "life settlement"?

A life settlement refers to the sale of an existing life insurance policy by the policyholder to a third party for an amount that is typically greater than the policy's cash surrender value but less than its death benefit. This option allows the policyholder to gain immediate cash, especially in situations where they no longer need the insurance coverage or can no longer afford the premiums.

In a life settlement, the third party who purchases the policy becomes responsible for paying the premiums and ultimately receives the death benefit upon the policyholder's passing. This can provide financial relief for the seller while presenting an investment opportunity for the buyer.

The other options represent different concepts related to life insurance but do not align with the definition of a life settlement. The payout received upon the policyholder's death refers specifically to the death benefit of the policy, while canceling an insurance policy pertains to relinquishing coverage (not selling it). Converting a term policy into a whole life policy describes a change in the type of insurance coverage rather than a sale of the policy itself.