Question 96

An agreement to pay a policyowner less than the expected death benefit.

A Life Settlement Contract involves a transaction in which a policyowner sells their life insurance policy to a third party for a sum that is less than the expected death benefit but more than the cash surrender value.

A) A bona fide business succession planning arrangement.

This option is incorrect because a Life Settlement Contract is not primarily related to business succession planning. Instead, it focuses on individual policyowners selling their life insurance for cash, which is distinct from business succession strategies.

B) An assignment of a policy as collateral for a loan made by a licensed financial institution.

This option is also incorrect as it describes a different financial arrangement. Assigning a policy as collateral involves securing a loan rather than selling the policy for a lump sum payment, which is the essence of a Life Settlement Contract.

C) The paying of predetermined surrender benefit by the insurer of the policy.

This option is incorrect because a predetermined surrender benefit refers to the amount an insurer pays when a policy is voluntarily terminated by the policyowner. A Life Settlement Contract is a sale of the policy, not a surrender.

D) An agreement to pay a policyowner less than the expected death benefit.

This option is correct as it accurately describes the nature of a Life Settlement Contract, where the policyowner receives a cash payout that is less than the policy’s face value but typically more than its cash surrender value.

Conclusion

The correct answer is D, as it encapsulates the fundamental principle of Life Settlement Contracts, which involve the sale of life insurance policies for less than their death benefit. Options A, B, and C do not accurately represent this concept, focusing instead on unrelated financial arrangements or definitions. Thus, D stands out as the definitive answer regarding the nature of Life Settlement Contracts.