Every year, more than $700 billion worth of life insurance value disappears when policies lapse or are surrendered, often for only a fraction of their true market worth. For decades, policyholders who no longer needed their coverage faced a simple but limited choice: keep paying premiums that had become too expensive, or walk away with whatever cash surrender value their insurer offered.
However, a third option exists that many Americans still don’t know about: life settlements.
Life settlements allow policyholders to sell their unwanted or underperforming life insurance policies on the secondary market for substantially more than the surrender value. Rather than abandoning a policy or accepting minimal returns, owners can convert these assets into immediate cash while transferring future premium obligations to a buyer. The concept has been around for years, yet many financial advisors estimate that fewer than 1% of eligible policyholders take advantage of this option.
Sanford Schmidt CLU,CHFC, founder and chairman of Schmidt Financial Group in Deerfield, Illinois, has spent more than four decades guiding affluent families through complex financial decisions. He sees life settlements as a powerful but underutilized tool in the wealth management toolkit. "People don't realize that their life insurance policy is an asset that can be sold," Schmidt explains. "They assume their only options are to keep paying or to surrender it back to the insurance company. But the market for these policies often values them at four times the surrender value or more."
The structure is straightforward. A buyer purchases the policy for more than its cash value but less than the death benefit, then assumes responsibility for all future premium payments. When the insured person eventually passes away, the buyer collects the death benefit. For the original policyholder, the transaction provides immediate liquidity and freedom from ongoing costs. For the buyer, it becomes an investment with a measurable return that is independent of stock market swings.
The reasons people consider selling their policies vary widely, but they share a common thread: circumstances change. The business partner who needed protection retired years ago. The children who once depended on that death benefit are now financially independent. The estate that required liquidity for tax purposes was restructured. Or perhaps most commonly, the premiums that seemed reasonable two decades ago have become an uncomfortable financial burden.
Schmidt recalls working with a recently retired executive whose universal life insurance policy had become increasingly expensive as he aged. "His kids were grown and financially secure. His estate plan had evolved. He was paying over $50,000 annually in premiums for a policy he no longer needed," Schmidt said. "By facilitating a life settlement, he received a seven-figure payout that he redirected toward long-term care planning and travel with his wife. It completely changed their retirement picture."
The eligibility criteria for life settlements are broader than many people assume. While seniors age 65 and older living in the United States represent the primary market, younger individuals with significant health changes or terminal conditions may also qualify.
The key requirements include a policy with at least $100,000 in death benefit from a U.S. carrier. Notably, there are no minimum or maximum life expectancy requirements, making the option accessible to a wide range of policyholders.
What makes life settlements particularly attractive is the flexibility in how proceeds can be used. Unlike some financial instruments with restrictions or tax implications that limit their utility, life settlement funds come with no strings attached.
Policyholders have used the money to enhance retirement income, cover medical or long-term care expenses, fund new investment strategies, pay down debt, support family members, or simply enjoy the lifestyle they envisioned for their later years.
The disparity between what insurance companies offer in surrender value and what the secondary market will pay highlights a fundamental misalignment in the traditional life insurance model. Insurance companies price surrender values based on their own calculations and reserve requirements, not on the actual market value of the policy as an investment vehicle. This creates an opportunity for policyholders willing to explore alternatives.
Schmidt, who holds credentials including Chartered Financial Consultant and Chartered Life Underwriter, emphasizes the importance of working with experienced advisors when considering a life settlement. "This isn't a decision to make lightly or without proper guidance," he noted. "You need someone who understands the tax implications, who can evaluate multiple offers, and who can help you consider how this fits into your overall financial strategy."
The process typically begins with a policy evaluation, where specialists assess the death benefit, premium structure, cash value, and the insured's health status. Multiple buyers may bid on the policy, creating a competitive marketplace that tends to drive up offers. Settlement providers often customize arrangements, allowing policyowners to retain a portion of the death benefit if desired, or receive a full cash payout.
For Schmidt's clients, life settlements often emerge as a solution during comprehensive financial reviews.
"We're looking at the whole picture: assets, liabilities, income needs, legacy goals," he explained. "Sometimes a policy that made perfect sense 20 years ago is now just dead weight in the portfolio. Converting that into liquid capital can open up new planning opportunities."
The language of life settlements reflects its position at the intersection of insurance and investment management. Terms like "underperforming assets" and "optimizing capital allocation" signal a shift in how sophisticated wealth managers view life insurance policies. Rather than set-it-and-forget-it protection products, they're increasingly seen as dynamic components of a financial plan that should be regularly evaluated for performance and relevance.
This perspective aligns with Schmidt's broader approach to wealth management at Schmidt Financial Group, where collaboration with legal and accounting professionals ensures that insurance strategies integrate seamlessly with estate and tax planning.
As a lifetime member of prestigious organizations including the Million Dollar Round Table's Top of the Table, Schmidt has built his practice on the principle that every element of a client's financial life should work in concert.
"The families we work with have complex situations," Schmidt said. "A life insurance policy isn't just about the death benefit anymore. It's about liquidity, estate equalization, business succession, charitable giving. When one of those purposes falls away, we need to reassess whether that policy still serves them or if there's a better use for those premium dollars."
As people live longer and families grow more complex, the old assumptions about life insurance are changing. Blended families, business transitions, shifting tax laws, and longer retirements all play a role. A policy that made perfect sense at age 40 may no longer fit at 70. Life settlements give policyholders a way to adapt, offering flexibility instead of forcing them to abandon years of value they’ve already built.
Schmidt points to a client whose situation crystallized the power of this approach. "He had maintained a large policy for estate tax liquidity. Tax law changes essentially eliminated his estate tax concern. Rather than surrender the policy for roughly $200,000, we facilitated a settlement that brought him close to $900,000. That capital became seed money for a family foundation he'd always wanted to establish."
The key, Schmidt emphasizes, is awareness. "Most people simply don't know this option exists. They receive a letter from their insurance company, see the surrender value, and think that's all they can get. We owe it to our clients to make sure they understand the full range of possibilities."
For policyholders wondering whether a life settlement makes sense, the first step involves honest assessment: Does this policy still serve its original purpose? Can I afford the premiums comfortably? Are there better uses for this capital?
If the answers suggest misalignment, exploring the secondary market becomes a logical next step.
Schmidt can be reached at Schmidt Financial Group for inquiries about life settlements and comprehensive wealth management strategies. His four decades of experience in guiding affluent families through financial complexities includes not just the technical aspects of insurance and estate planning, but the human elements of family dynamics, legacy wishes, and the peace of mind that comes from knowing a lifetime of work will be preserved for future generations.
The life settlement market represents more than just a financial transaction. It's a recognition that flexibility matters, that circumstances change, and that the financial products serving us today should adapt to serve us tomorrow. For the millions of Americans holding life insurance policies that no longer fit their lives, understanding this option could mean the difference between abandoning value and capturing it.
