Legal Definitions - life settlement

A life settlement is a transaction where a terminally or chronically ill person sells the benefits of their life insurance policy to a third party in exchange for a lump-sum cash payment. This payment is usually a percentage of the policy's face value. When the insured person dies, the investor receives the insurance benefit. This is also known as a viatical settlement.

For example, an AIDS patient may sell their life insurance policy at a discount of 20% to 40% depending on their life expectancy. The investor pays the patient a lump sum and receives the insurance benefit when the patient dies.

Life settlements are different from other types of settlements, such as property settlements, which involve the conveyance of property or interests in property to provide for beneficiaries in a way that differs from what they would receive as heirs under the statutes of descent and distribution. Other types of settlements include structured settlements, which involve the defendant agreeing to pay periodic sums to the plaintiff for a specified time, and out-of-court settlements, which are arrived at without the court's participation.