In a life settlement, the policyowner typically:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A life settlement is a transaction in which the owner of an existing life insurance policy sells the policy to a third-party investor for a lump-sum cash payment that exceeds the policy's cash surrender value but is less than the face amount. The investor becomes the new owner and beneficiary, continues paying premiums, and collects the death benefit when the insured dies. Life settlements are alternatives to surrendering or letting a policy lapse, often used by older insureds who no longer need the coverage. These transactions are heavily regulated to protect consumers from abuses such as stranger-originated life insurance (STOLI).
Why the other options are wrong
- B) Exchanging policies under Section 1035 is a tax-free exchange of life policies or annuities, not a sale to an investor.
- C) Surrendering to the insurer returns the cash value, whereas a life settlement sells the policy itself to a third party for a negotiated price.
- D) Naming the insurer as beneficiary is not how premiums are reduced; that description has no basis in life settlement practice.
Memory hook
Life settlement = sell your unwanted policy to an investor for cash now; the investor waits for the death benefit.