A settlement in which a terminally ill insured sells an existing life insurance policy for a lump sum that is less than the death benefit but more than the cash surrender value is called a:
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A viatical settlement is a transaction in which an insured who has a terminal illness sells an existing life insurance policy to a third party for a lump sum that is less than the death benefit. The buyer becomes the beneficiary and continues paying premiums, collecting the full death benefit when the insured dies. In California, life settlements and viatical settlements are regulated under CIC §10113.1 et seq., and persons negotiating these transactions generally must hold a life settlement broker license. A viatical settlement typically pays more than the policy's cash surrender value, giving the terminally ill insured immediate funds.
Why the other options are wrong
- A policy loan is a borrowing against the policy's cash value, not a sale of the policy; the policy remains with the insured and the loan amount must be repaid with interest.
- Nonforfeiture options, such as cash surrender, reduced paid-up, and extended term, are elections the policyowner makes with the insurer when coverage ends; they do not involve a third-party buyer. This choice does not fit the arrangement described in the question, so it is clearly not the right option to choose.
- Dividend accumulation leaves dividends with the insurer to earn interest; it is an option for participating policies and does not involve selling the policy to another party. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.
Memory hook
A viatical settlement lets a terminally ill insured sell the policy for cash now.