What type of policy is typically involved in a life settlement?

A life settlement typically involves a policyholder selling their existing life insurance policy to a third party for a lump sum cash payment, which is higher than the policy’s cash surrender value but less than its death benefit. Whole life insurance is the correct answer because this type of policy offers a guaranteed death benefit along with a cash value component that accumulates over time.

Whole life policies are generally permanent, meaning they do not expire as long as the premiums are paid, which makes them attractive for life settlement transactions. The cash value can be substantial as the policyholder ages, providing a financial incentive for the sale. Unlike term life insurance, which has no cash value and expires after a specific period, whole life policies can be monetarily utilized in a settlement.

Universal life insurance may involve some cash value and flexible premiums, but it often lacks the stability and predictability of whole life, making it less common in life settlements. Group life insurance is usually provided through an employer or organization and is typically term coverage; it often does not have transferable cash value.