Life Settlement Calculator

What Is a Life Settlement and Who Qualifies?

A life settlement is the sale of an existing life insurance policy by the policyholder (typically a senior aged 65 or older) to a third-party investor for a lump-sum cash payment greater than the policy's cash surrender value but less than the death benefit. The buyer assumes all future premium payments and collects the death benefit when the insured passes away. According to the Life Insurance Settlement Association (lisa.org), the life settlement market paid out over $4.7 billion to policyholders in 2023, representing policies with a combined face value exceeding $21 billion.

To qualify for a life settlement, the insured typically must be 65 or older (or younger with serious health impairments), the policy must have a face value of at least $100,000, and the policy must be at least 2–5 years old (depending on state law). Whole life, universal life, survivorship life, and certain convertible term policies are all eligible. Term policies with fewer than 2 years remaining are rarely settleable. The National Association of Insurance Commissioners (naic.org) regulates life settlement transactions in most US states, requiring licensed brokers and consumer disclosure.

How Life Settlement Values Are Calculated

Life settlement buyers — primarily institutional investors and hedge funds — use a net present value (NPV) model to determine what a policy is worth to them. The offer to the seller is driven by four main variables:

• Life expectancy of the insured: The shorter the estimated life expectancy, the higher the offer. Buyers use independent life expectancy reports from specialist underwriters (e.g., 21st Services, AVS Underwriting). A 78-year-old in poor health may receive 35–45% of face value, while an 80-year-old in excellent health may receive only 15–20%.
• Future premium burden: Every dollar the buyer must pay in future premiums reduces the net value. Policies with high annual premiums relative to face value are worth less. The buyer's internal return target is typically 12–18%, so premium-heavy policies only command higher offers when life expectancy is short.
• Policy face value: Institutional buyers prefer policies above $500K because due diligence costs are roughly the same regardless of policy size. Policies under $100K are rarely settled. Larger policies attract more bidders, driving prices up through competition among funds.
• Policy type: Universal life policies are the most commonly settled because premiums can be flexibly managed by the buyer to minimize cost. Whole life policies are reliable but have higher fixed premiums. Convertible term policies can be settled if converted before expiry; non-convertible term is rarely settleable.

This calculator uses industry benchmarks from FINRA (finra.org) and LISA (lisa.org) to estimate settlement ranges. Actual offers from licensed providers may vary based on proprietary actuarial models.

Life Settlement vs Cash Surrender Value vs Lapsing

Policyholders who no longer need their life insurance typically face four choices, each with very different financial outcomes:

• Lapse the policy: Stop paying premiums and receive nothing (or only a small nonforfeiture benefit). This is the worst financial outcome in almost every scenario — policyholders collectively leave billions on the table annually by lapsing settleable policies.
• Surrender the policy: Cancel the policy and receive the cash surrender value (CSV) from the insurer. This is always better than lapsing but significantly less than a life settlement — typically 3 to 5 times less, according to LISA.
• Life settlement: Sell the policy for 20–40% (or more) of face value. The cash payment is immediate and final. You give up the death benefit permanently. Best for seniors who no longer need the coverage or cannot afford premiums.
• 1035 Exchange: Exchange the policy tax-free for an annuity or long-term care insurance under IRS Section 1035. No cash received, but the policy's accumulated value rolls into a new financial product. Best for seniors who want to redirect coverage into retirement income or LTC protection without tax liability.

A life settlement almost always yields significantly more cash than surrendering. The Life Insurance Settlement Association reports that the average life settlement pays 4 times the cash surrender value. However, there are costs: broker commissions (20–30% of the settlement), potential tax liability, and the permanent loss of the death benefit that beneficiaries would have received.

Tax Implications of a Life Settlement

The tax treatment of life settlement proceeds is governed by IRS guidance and is more complex than many policyholders expect. The proceeds are split into three tiers with different tax treatment:

• Tax-free return of basis: The portion of the settlement equal to the total premiums you paid into the policy (your cost basis) is tax-free, as it is a return of capital already taxed.
• Ordinary income — gain above basis up to CSV: The amount exceeding your premium basis but not exceeding the cash surrender value is taxed as ordinary income. For a taxpayer in the 22% bracket, this portion faces a substantial tax bill.
• Capital gains — gain above CSV: Settlement proceeds exceeding the cash surrender value are taxed at long-term capital gains rates (0%, 15%, or 20% depending on income), which is more favorable than ordinary income rates.

For example: if you paid $150,000 in premiums, your CSV is $80,000, and you receive a $200,000 settlement — the first $80,000 is tax-free return of basis (assuming basis = CSV here for simplicity), the next amount up to CSV is ordinary income, and the remaining $120,000 is capital gains. Always consult a tax professional before completing a life settlement. Sources: naic.org, finra.org, lisa.org. Last updated: May 2026.