Colorado Life Producer License Practice Test

What is not true for life settlements?

1. The seller must be terminally ill

2. The policies sold must be owned for a minimum of 2 years

3. They can involve secondary market sales

4. Life settlements can provide financial liquidity

The correct answer is: The seller must be terminally ill

In the context of life settlements, it's important to understand that the seller of a life insurance policy does not need to be terminally ill for the transaction to occur. A life settlement is essentially the sale of an existing life insurance policy to a third party in exchange for a lump-sum payment. The seller may be a policyholder who is seeking financial benefits from their policy but does not necessarily have to be in poor health or terminally ill. This misconception often arises because people tend to associate life insurance settlements primarily with individuals facing severe health issues; however, the regulations do not stipulate such a requirement. For the other options, they are true within the industry. Life insurance policies that are eligible for settlement must typically have been owned for a minimum duration, often required to be at least two years. This waiting period helps ensure that the policy has a valid history and discourages individuals from purchasing policies solely for the purpose of selling them immediately for profit. Furthermore, life settlements do indeed involve secondary market sales, which means that investors can purchase these policies in a marketplace after they've been settled. Lastly, life settlements can provide significant financial liquidity to the policyholder, allowing them access to cash that can be used for other financial needs or investments.