Which of the Following Is Not True of Life Settlements? The Answer and the Law

Last reviewed: October 3, 2026. This article is general information, not legal, tax or financial advice. Life settlements are regulated state by state, so check your state insurance department's rules before you sell.

If you've landed here from an insurance licensing exam, or because someone has offered to buy your life insurance policy, the good news is that the basic idea is simple. The details are where people lose money, though, so it's worth understanding both the quiz answer and the law behind it.

Short answer: in a life settlement, a policy owner sells an existing life insurance policy to a third party for a lump sum that is usually more than the cash surrender value but less than the death benefit. The buyer then pays the premiums and collects the death benefit. The statement that is usually not true is that the insured must be terminally ill: that describes a viatical settlement, and life settlements are commonly made by older people in ordinary health. Other false statements you'll see on quizzes include "the seller receives the full death benefit" and "the seller keeps paying the premiums".

How a life settlement works

The SEC's investor bulletin on life settlements describes the usual chain of people involved:

1. You, the policy owner (the model act calls you the "viator"), decide you no longer need the policy, perhaps because a spouse has died, children have grown up, a business has been sold, or the premiums have become hard to afford.
2. A life settlement broker shops your policy. Under the NAIC model, the broker represents you, not the insurer or the buyer, and owes you a fiduciary duty.
3. Life settlement providers review your medical records and life expectancy estimates and make offers.
4. The buyer pays you, becomes the policy owner and beneficiary, keeps paying the premiums, and receives the death benefit when the insured dies.

That is why, in the SEC's words, the payment is "generally less than the death benefit on the policy, but more than its cash surrender value." The buyer is betting on how long the insured will live, and brokers and providers charge commissions on top.

Common statements, true or false

• "The insured must be terminally ill." False for life settlements. That's the viatical settlement subset.
• "The seller receives the full face amount." False. You get a lump sum below the death benefit.
• "The buyer pays future premiums." True.
• "A life settlement is the same as surrendering the policy." False. A surrender is a deal with your insurance company for the cash value. A settlement is a sale to a third party.
• "The buyer will see the insured's medical information." True. You will be asked to authorize the release of medical records, and the SEC flags privacy as a real issue.

How state law protects sellers

Life insurance is regulated by the states, so the protections depend on where you live. Many states have adopted a version of the NAIC model act or a similar model. The NAIC model's main protections are:

• Licensing. Section 3 says a person shall not operate as a provider or broker "without first obtaining a license from the commissioner". You can check a license with your state insurance department.
• Written disclosures about alternatives (such as accelerated death benefits or policy loans), taxes, creditors' claims and the effect on Medicaid and other benefits.
• A right to cancel within the rescission period quoted above.
• Prompt payment. The model says funds will be sent within three business days after the provider receives the insurer's written acknowledgment that ownership has been transferred.
• A waiting period aimed at "STOLI". Section 11 makes it a violation to settle a policy within five years of its issue date unless certain conditions are met, such as terminal or chronic illness, the death of a spouse, divorce, retirement, disability, bankruptcy, or a policy that was funded in an ordinary way for at least two years. This targets stranger-originated life insurance, where policies are taken out mainly so they can be sold to investors. The exact period and exceptions vary by state.

Before you sell: practical steps

• Ask your insurer about alternatives first: accelerated death benefits, a policy loan, reducing the face amount, or converting a term policy.
• Check licenses. Confirm the broker and provider are licensed in your state.
• Get more than one offer, and ask the broker to disclose all offers and its commission.
• Talk to a tax advisor. Some or all of the proceeds may be taxable, and the rules depend on your health and who buys the policy.
• Think about benefits and family. Medicaid eligibility and your heirs' expectations can both be affected.
• Keep copies of everything and note the date your rescission period ends.

Common mistakes

• Assuming the first offer is fair. Offers depend on life expectancy estimates that differ between companies.
• Forgetting that, once the deal closes, your beneficiaries will not receive the death benefit.
• Going along with a plan to buy a new policy so it can be sold soon after. That pattern is exactly what the STOLI rules are designed to stop.

Sources

• NAIC, Viatical Settlements Model Act (Model #697): content.naic.org (PDF)
• NAIC, directory of state insurance departments: content.naic.org
• SEC Office of Investor Education and Advocacy, Investor Bulletin: Life Settlements: investor.gov
• 26 U.S.C. § 101 (life insurance proceeds, including § 101(g)): Cornell LII