Raising cash in a hurry #10: Sell your life insurance

Update May 2009: The IRS has issued a couple of ruling recently that could affect taxation on viaticals, so check with your accountant before dipping into this market.

Yes, you did buy that life insurance for a reason and you may have family members who would desperately need the proceeds in the event of your untimely demise. But if things are getting desperate now, you may be able to turn that policy into cash. And, no, you don't have to die to do it.

If it is "whole" or "universal" life (a type of insurance you buy to last your "whole" life and your heirs get the payout even if you live to 104), you pay higher premiums, but the insurance has a "cash value" that you can tap any time. All you have to do is call your life insurance company to access the money. It won't be much if you've only had the policy a few years, but at least you won't be paying premiums anymore. This is an option that you should only take if you are still fairly young and healthy, really desperate for cash and can't afford the premiums anyway.

However, if you are elderly or terminally ill, there is another way to cash in your insurance policy that may indeed make sense for you and can net some serious dollars right away. If you've never heard of it, it sounds like a scam (and, beware, this industry has been filled with scammers). Here it is: You can sell your insurance policy to an investment company (usually through a broker), who will continue paying the premiums until you die, at which point the company will collect the benefits.

Depending on how long you are expected to live, you can sell your policy for between 30% and 80% of the face value of your policy -- an amount that will be much higher than the cash value of a whole or universal life policy. These deals are called either "viatical settlements" (usually if you are terminally ill and have less than two years to live) or "life settlements" (when it is an elderly person with less than 12 years of life expectancy).

The rules get very complicated about what kinds of policies you can sell and depend on who you sell them to (you may be able to sell your policy from work; you can sell "term" life policies as well). You may even get the money tax free. If you are interested, you can read some general information on viaticals from the National Association of Insurance Commissioners and peruse information on the website of the Life Insurance Settlement Association (LISA), a trade association for this industry that also provides lists of viatical settlement companies by state). General rules are to get quotes from several investment companies and watch out for high commissions.

The downside of this route is that you will be depriving your heirs of reaping the full 100% value of the policy when you die. You should probably discuss it with them before you sell and perhaps they can help you out financially if they understand that you will otherwise have to sell the policy.

Bottom line on viatical settlements: If you are terminally ill or very old, need cash to live on, and don't have heirs who can help you out now, selling your life insurance policy may make a lot of sense.

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