Money Tips: Letting strangers bet on your demise

By Marshall Loeb, Pittsburgh Post-Gazette, May 28, 2006

NEW YORK -- There's a secondary market for everything these days -- including your own life insurance policy.

During the AIDS crisis of the 1990s, investors bought policies from terminally ill people who needed cash for medical care and living expenses in what came to be known as viatical settlements. But the market for viaticals largely dried up after investors got burned when AIDS patients started living longer. Now, "life settlements" have taken their place and the practice is booming.

Life settlements are essentially the same thing as viaticals, except that the policyholder doesn't have to be terminally ill to sell.

Say you're a 60-year-old with a $1 million whole life policy that you don't want any more. Maybe you don't have children, or you just can't afford the premiums.

A life-settlement firm may offer you from 15 percent to 30 percent of the policy's face value (depending on life expectancy, cash value and type of insurance) to take over the premiums for you. That's three to four times what you'd get by simply cashing in the policy with the insurer, says Doug Head of the Life Insurance Settlement Association, which advocates for settlement purchasers.

When you die, the investors get the $1 million.

How do the investors make a profit? They're betting you'll kick the bucket before they have to make too many payments. If you do, they stand to reap a sweet return on their investment.

The catch? There are a few, not the least of which is that you've just sold a stranger an interest in your early demise.

The market for life settlements is relatively new and lightly regulated for the time being, so fly-by-night firms are out there -- make sure you're dealing with a company that's licensed in your state. Commissions can be hefty -- often running to 8 percent of the purchase price or more -- but will likely come down in the future as the practice becomes more mainstream, says Glenn S. Daily, a fee-only insurance adviser in New York.

If you do sell, typically through an insurance agent who will split the fees with a settlement broker, bargain the commission down. And you may want to consult an estate planner or attorney, since you'll owe taxes on the settlement.

How do you know if you're getting a good deal? You can do the actuarial calculations or shop around.

Unlike shopping for a new policy, selling your insurance puts the ball firmly in the policyholder's court. If you smell a raw deal, walk away. And, paradoxically, there's no rush. The closer you are to the grave, the more money you'll get for selling your insurance policy.