Those in the financial world know that life insurance policies are taken out for a variety of reasons. The policy could serve to cover a mortgage or buy out a business partner in the event of an untimely death. It could simply provide towards the cost of college if a parent were to die. But, situations change. The mortgage gets paid off, the business partners part ways and the kids all get scholarships to college. It is in these situations that a life settlement can be a wise decision.

A life settlement is when the owner of a life insurance policy sells that policy for a lump sum of money. There are many reasons for doing this, but the most important is that a life settlement provides the policyholder with immediate funds rather than possibly lapsing on a policy where the owner would receive nothing.

Not every life insurance policyholder qualifies for a life settlement. Depending on the buyer, there are certain restrictions regarding the policy's face amount, the age of the policy and the age and/or life expectancy of the policyholder. Still, for those that qualify, a life settlement provides an excellent opportunity for immediate income. There are several ways to use this income:

Investments

The lump sum that comes from an insurance settlement can be used to invest in stocks, bonds, mutual funds or even other insurance products. If the investor is looking for opportunities to build or enhance an existing portfolio, an infusion of cash from a life settlement could be a great strategy. Of course, investment opportunities can also be found in real estate. This could be an ideal strategy for funding that second home in the mountains or that beachfront vacation home.

Maintaining Lifestyle

An insurance settlement can provide the immediate income needed for retirees to maintain the lifestyle to which they are accustomed. Proceeds from the life settlement could be used to construct an income portfolio or even purchase an immediate annuity providing guaranteed lifetime income payments.

Long-Term Care

Long-term care can be a huge drain on a family's personal finances - especially when long-term care insurance has not been purchased. Choosing a life settlement can provide the income needed to pay for long term care. If properly structured, the income portfolio can be designed to create the stream of income closely matched to the policy's annual premium. This can be a huge relief to families dealing with a long-term illness.

Other Financial Objectives

There are other ways to use a life settlement that may not necessarily be traditional choices. Some policyholders choose to use their lump sum to make gifts to heirs. For some, it is worth it to be able to see family enjoying their inheritance. Other policyholders that receive a life settlement choose to donate to charity. This can be a beautiful way to make a lasting impression.

Of course as with all investment and money issues, if an investor is unsure how to build a diversified portfolio or what exactly to do with a life settlement, professional advice and management should be considered.