Colorado Life Producer License Practice Test

What is true of life settlements?

1. Can be used for key person insurance

2. Must be for whole life policies only

3. Involve policies with small face amounts

4. Are only applicable to terminally ill individuals

The correct answer is: Can be used for key person insurance

Life settlements are financial transactions in which a policyholder sells their life insurance policy to a third party for a lump sum payment that is less than the death benefit but more than the cash surrender value. One of the proper uses of life settlements is in the context of key person insurance. Key person insurance is a policy taken out by a business on the life of an essential employee, usually to protect the business from financial losses that could occur due to the death of that individual. If the business decides that the key person's policy is no longer needed, it can sell that policy in a life settlement, thus allowing the company to recoup some financial value for their investment. The other choices do not accurately reflect the broader applications and requirements of life settlements. For instance, life settlements are not limited to whole life policies, as they can also apply to term life and universal life policies. Similarly, there are no restrictions on the size of a policy’s face amount, and life settlements are not solely applicable to terminally ill individuals; people with a range of health statuses can participate in selling their policies.