What does a "life settlement" involve?

A "life settlement" refers specifically to the sale of an existing life insurance policy to a third party for a sum that is typically higher than the cash surrender value but lower than the death benefit. This process allows the policyholder, often facing financial difficulties or needing cash for other reasons, to receive a payout immediately rather than waiting for the death benefit to be paid out after their passing.

In a life settlement transaction, the new owner of the policy assumes responsibility for paying the premiums, and they will eventually collect the death benefit upon the death of the insured. This can be a beneficial option for individuals who no longer need or want their life insurance but still want to derive some value from it.

The other options do not accurately describe the nature of a life settlement. Transferring an insurance policy to a new beneficiary is different from a life settlement, as it involves simply changing who receives the death benefit without selling the policy itself. Cancelling a life insurance policy for cash pertains to cash surrender values, not sales. Assigning death benefits to a family member is a similar process to changing beneficiaries, and does not involve selling the policy. Thus, the focus on selling an existing policy to a third party distinguishes the correct answer.