What is a 'life settlement'?

A life settlement refers to the sale of a life insurance policy to a third party for an amount that is typically more than its cash surrender value but less than the death benefit. This financial transaction allows policyholders, often seniors, to convert an unwanted or unaffordable life insurance policy into immediate cash.

The correct choice highlights the idea that the transaction is often beneficial for those who may no longer need the insurance or who wish to obtain liquidity. It involves a secondary market for life insurance, where the new owner of the policy assumes the premium payments and will receive the death benefit upon the original policyholder's passing. This option is distinct because it emphasizes the financial viability of transferring ownership of the policy rather than simply liquidating it for its cash value.

The other options describe different concepts: converting a life insurance policy into an annuity represents a different method of utilizing insurance products; transferring rights to a beneficiary speaks to the standard operation of naming beneficiaries without financial compensation; and borrowing against the cash value pertains to policy loans, which do not involve selling the insurance policy itself. Each of these alternatives fails to capture the essence of life settlements as a market transaction involving third-party buyers.