A life settlement is a financial transaction in which a life insurance policy holder sells a no longer wanted or needed policy to an investor for more than the cash surrender value offered by the life insurance company. The investor pays all subsequent premium payments to the life insurance company and receives the contract face value at maturity.
For the policyholder, life settlements have opened up a secondary market providing enhanced market values for his or her policy, rather than the lower cash surrender value offered by the life insurance company.
For the investor, a portfolio of life settlements offers a comparatively low risk-return trade-off compared with equities. Further, life settlements diversify overall investment risk because mortality rates are not correlated with other asset classes. Institutional investors in life settlements include investment banks, insurance companies, private banks, hedge funds, pension funds and wealthy private investors.