Sell your life to a stranger

By Kiplinger's Personal Finance Magazine

Many seniors are now selling their life insurance policies to raise cash. In 2006 alone, policies worth $6.1 billion in death benefits changed hands -- and that was before the Wall Street tsunami wiped out so many 401k's.

This trade wouldn't be possible, however, except for one controversial aspect: The party on the other end profits from your death -- and the sooner, the better.

• Calculator: Do you have enough life insurance?

When you (or a family member who may actually own the policy on your life) sell the insurance, the buyer becomes the owner and beneficiary. Upon your death, this stranger stops paying premiums and collects the death benefit.

These transactions used to be called viatical settlements. Their debut was especially ghoulish because early investors generally were small companies that offered big discounts from the death benefit to buy policies from AIDS patients, who weren't expected to last long and desperately needed cash for medical bills. (Some investors lost a lot of money when new drug combinations greatly prolonged the lives of AIDS patients.)

Now these deals are called life settlements and are moving to the financial mainstream. Institutions such as Goldman Sachs, JPMorgan Chase and Credit Suisse, as well as hedge funds and German pension funds, invest in packages of life settlements because the rate of return is not correlated to the stock market, making life settlements a portfolio diversifier. Even some life insurance companies are becoming investors.

How the process works

If a settlement is a great deal for Goldman Sachs, can it be fair to you and your family? The answer is partly a matter of perception: Does $125,000 seem like a small fortune to you? Or is the reduced amount a sacrifice?

As the life-settlement business grows, it's getting cleaner, and pricing is becoming more consistent. Investors usually prefer people over 65 who are insured for $500,000 or more. If you have a cash-value policy, they'll generally offer far more than you would get by surrendering it to the insurance company -- often two and a half times that amount, says insurance adviser Norman Hood of Rushville, Ill. Investors will also buy term policies, which have no cash value, if the policy is convertible to a cash-value policy and the premiums make sense to the investor.

• Calculator: What is your life expectancy?

The size of a settlement varies with the insured person's age, health and life expectancy, but sellers generally get 20% to 30% of the death benefit.

The hunt for this treasure starts with a life-settlement broker, which you can locate online or through a financial adviser. These middlemen gather your health and financial data and solicit settlement offers from investors. One transaction feeds a bunch of mouths, so brokers expect competing offers to vary, sometimes drastically.

Insist that the broker get five or six offers and show you all of them, as some states require. Be suspicious if anyone tries to steer you toward a single offer, because it may be the deal with the highest commission. You've kissed away a fortune if you discover that the broker took a cut of 30% of the death benefit when 10% of the settlement amount is fair.

It is getting easier to assess life-settlement offers. Some institutional investors have banded together to create disclosure forms and other standards as they try to drive out smaller middlemen and other investors. Some independent insurance analysts and agents will estimate your policy's value for a flat fee, such as $1,000 or $2,000.

Continued: Easier assessments

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