United States
Hong KongThird-party ownership and life settlements
Third-party ownership means the owner is not the insured, which is normal in business and estate arrangements. A life settlement is the sale of an existing policy to a third party for more than its cash value. A viatical settlement is the same transaction where the insured is terminally ill.
Section IV opens with these two sub-items and they are more connected than the outline's ordering suggests. Both are about the policy ending up in hands other than the insured's, and the exam tests whether you know which arrangements are ordinary and which are regulated.
Third-party ownership, which is routine
The owner controls the policy and the insured is the life covered, and there is no requirement that they be the same person. Common arrangements where they are not:
- A business owning a policy on a key employee.
- Business partners owning policies on each other under a buy-sell agreement.
- A parent owning a policy on a child.
- A trust owning a policy so the proceeds sit outside an estate.
- A creditor owning a policy on a debtor, to the extent of the debt.
Each one satisfies insurable interest at inception and each one has a purpose other than speculating on a death. That is the whole test, and it is what separates every item on that list from the STOLI arrangements the outline treats separately in section III.
What the owner controls
| Right | Owner | Insured (if different) |
|---|---|---|
| Name and change the beneficiary | Yes | No |
| Take a policy loan or surrender | Yes | No |
| Assign the policy | Yes | No |
| Consent to being insured | No | Yes, at application |
| Receive the death benefit | Only if named beneficiary | Not applicable |
Every ownership right sits with the owner. The insured keeps only the consent that made the policy possible in the first place, which is why a stem that carefully separates the two roles is nearly always asking you which of them can change the beneficiary.
Life settlement and viatical settlement
| Life settlement | Viatical settlement | |
|---|---|---|
| The insured | Typically older, not terminally ill | Terminally ill |
| Price | More than cash value, less than face amount | Higher share of face amount, because the wait is shorter |
| Who pays future premiums | The buyer | The buyer |
| Who receives the death benefit | The buyer | The buyer |
| Tax treatment | Generally taxable in part | Often excluded from income where the insured is terminally ill |
The bottom row is the discriminator. A viatical settlement to a terminally ill insured is treated much like an accelerated death benefit for tax purposes, and a life settlement by a healthy retiree who simply no longer needs the coverage is not, so two transactions with an identical shape can land in completely different places on a tax return. The difference is medical.
A retired woman in good health sells her paid-up whole life policy to an investment company for more than its cash surrender value. Who receives the death benefit when she dies?
- Her original beneficiary, since a sale cannot change a designation
- The investment company, which became the owner and beneficiary
- Her estate, since the policy was paid up before the sale
- The investment company, less the cash surrender value
Selling a policy is not a partial transaction. The beneficiary loses the death benefit entirely, the seller cannot buy it back, and the price is negotiated rather than set by a table. An accelerated death benefit, by contrast, keeps the policy in the owner's hands and leaves the beneficiary with the balance.
Where it sits
- Section
- IV, retirement and other insurance concepts, 8 questions
- Listed as
- A. Third-party ownership and B. Life settlements
- Section IV also covers
- Group life, retirement plans, needs analysis, Social Security, tax treatment
- Our estimate
- About one question between the two, ours and not published
Section IV is worth 8 questions and carries seven lettered headings, which makes it the thinnest section per topic in the general portion. Nothing in it justifies a long study session on its own, and that is worth knowing before you sink an evening into life settlement regulation.
The opinion, and the concession
Learn this alongside STOLI and accelerated death benefits, as a group of three ways value comes out of a policy other than by dying. That grouping is not the outline's, it is ours, and it is faster than meeting the same ideas in three separate sections weeks apart. The exam does not care what order you learned them in.
The concession: settlement transactions are regulated at state level and Texas has its own requirements for providers and brokers that sit outside the chapters we hold in full. The tax treatment is federal and depends on facts about the seller. This page gives you the shape of the transaction, which is what the outline asks for, and stops short of what a settlement broker would need to know.
Common questions
What is the difference between a life settlement and a viatical settlement?
The insured's health. A viatical settlement involves a terminally ill insured, which shortens the buyer's expected wait and raises the price paid, and it often qualifies for favorable tax treatment. A life settlement involves an insured who is simply older, and the proceeds are generally taxable in part.
Can someone own a policy on another person's life?
Yes, provided insurable interest existed when the policy was bought and the insured consented. Businesses, partners, parents, trusts and creditors all commonly own policies on lives other than their own, and every ownership right sits with the owner rather than the insured.
What happens to the original beneficiary when a policy is sold?
They lose the benefit entirely. A settlement transfers ownership of the contract, and the new owner names itself as beneficiary and pays the remaining premiums. That is the sharpest difference from an accelerated death benefit, where the policy stays put and the beneficiary keeps the balance.
Is a life settlement the same as STOLI?
No. A life settlement sells a policy that was bought for a genuine need, with the decision to sell coming later. STOLI arrangements are set up before the policy is issued so that investors can take it over, which means the insurable interest at inception was manufactured.