Connecticut Life Producer Practice exam

What is a life settlement?

1. A process where the beneficiary receives a benefit

2. A transaction where the owner sells a life insurance policy to a third party for compensation

3. An option to convert term insurance into whole life

4. A method of transferring ownership of a policy to a family member

The correct answer is: A transaction where the owner sells a life insurance policy to a third party for compensation

A life settlement refers to a transaction in which the policyowner sells their life insurance policy to a third party for a lump sum payment that is greater than the cash surrender value of the policy but less than the death benefit. This option allows the policyowner to receive immediate cash instead of waiting for the death benefit to be paid out upon death. In this arrangement, the third party becomes the new owner and beneficiary of the policy, and they are responsible for continuing to pay the premiums. This can be beneficial for the seller, especially if they no longer need the policy or can no longer afford the premiums, while providing the purchaser an investment opportunity. The other options describe different concepts related to life insurance but do not accurately define a life settlement. For instance, the first option discusses a benefit to a beneficiary, which is not the transaction aspect of selling a policy. The third option describes a conversion privilege often associated with term policies, and the fourth option refers to transferring ownership within a family, which also does not comprise the essence of life settlements.