Retained Death Benefits in Life Settlements: What Happens If the Buyer Stops Paying Premiums?

A common question that comes up occasionally in the life settlement world is:

"What happens if I keep a retained death benefit and the buyer stops paying premiums?"

This is a legitimate question — and one that should be addressed clearly before any transaction is completed.

What Is a Retained Death Benefit?

In some life settlement transactions, the policy owner does not sell 100% of the policy face value in return for a lump sum payment, which is the way things are done with traditional life settlements.

Instead, the seller:

• Receives cash payment upfront
• Retains a portion of the death benefit
• Transfers responsibility for all future premium payments to the buyer

This structure is known as a retained death benefit or RDB. It allows the seller to access liquidity today while preserving a defined payout for heirs later. In other words, this is a slightly different type of life settlement that can be more prevalent in terminally ill cases in which the insured's health status leads to a short life expectancy. In these cases, the policyholder may want to provide for their loved ones in the future, while still getting access to a cash payout today.

The Real Risk: Policy Lapse

The primary risk in a retained death benefit structure is straightforward:

If the buyer fails to pay premiums and the policy lapses, the retained death benefit disappears.

That risk is real, and it should never be ignored or minimized.

How Retained Death Benefit Protections Work

Well-structured life settlement offer agreements address this risk directly through contract provisions that should enable you to have sufficient peace of mind (or if you have anxiety, it should be for other, better reasons). Common protections include:

Step-In Rights

If premiums are missed, the original policy owner has the right to step in, assume ownership, and continue paying premiums to keep the policy in force.

Ownership Reversion Clauses

Some agreements provide that ownership reverts to the seller if the buyer defaults on premium payments.

Advance Notice Requirements

Contracts typically require formal notice if premiums are not paid, giving the seller, their advisor, or their attorney time to act before lapse occurs.

Professional Policy Servicing

Institutional buyers use third-party servicing companies to track premiums, deadlines, and notices. This reduces the risk of silent lapses and creates an audit trail.

What You Should Be Able to Answer Before Signing

Before agreeing to a retained death benefit structure, you should be able to answer, in plain language:

• What constitutes a premium default?
• How and when will I be notified?
• What rights do I have to take back control of the policy?
• How much time do I have to act before lapse?

If these answers are not written clearly into the settlement documents, the structure is incomplete.

The Bottom Line on Retained Death Benefits

A retained death benefit can be a powerful planning tool when done correctly- giving you a lump sum of cash today, and part of the life insurance coverage in the future by giving you a portion of the policy's death benefit. But it only works if downside scenarios are addressed with the same care as the upside.

Your family's future benefit should never depend on assumptions, goodwill, or a handshake decades from now. It should be protected by clear, enforceable contract terms from day one and made as an informed decision.