What is a "life settlement"?

A life settlement refers specifically to the transaction in which an existing life insurance policy is sold to a third party for a value that is greater than its cash surrender value but less than the death benefit. This allows the policyholder to receive a payout while still alive, which can be particularly beneficial for those who no longer need the policy or can no longer afford the premiums. The buyer of the policy, often an investor or a specialized company, takes over the premium payments and ultimately collects the death benefit upon the policyholder's passing.

In contrast, the other options do not accurately describe a life settlement. The purchase of an insurance policy by an insurer typically involves new policies, not existing ones. A loan against a life insurance policy's cash value refers to borrowing funds from the insurer using the policy’s cash value as collateral, rather than transferring ownership of the policy. Lastly, insurance fraud, including any fraudulent activities involving existing policies, is illegal and does not represent the legitimate financial transaction of a life settlement.