A regular life settlement is the same thing as a viatical settlement except it is provided to an insured who is not terminally or chronically ill.  This type of payment is taxed similarly to when a policy owner surrenders their policy for the cash surrender value. The difference is that a regular life settlement is always going to be more than the cash surrender value.  The amount received in excess of the cash surrender value is taxed as capital gains rather than as ordinary income.