Life settlements: lifeline for the elderly or ripoff?

Cash hereAre you older or in poor health? Here's a pitch that you'll hear a lot in the near future -- Your life insurance policy will pay plenty when you die; why not enjoy that money now when you need it?

Investors will buy your policy today, for a percentage of the settlement after you pass, and pay you a lot more than you'd receive if you simply cashed it in with the life insurance company. In 2005, individuals held an estimated $18.4 trillion in life insurance.

Is this a good deal? Last year, older Americans sold policies with a face value of $11.8 billion, for 20-200% more than they would have received by cashing them in. Types of insurance eligible include universal life, convertible term, whole life, and some specialized types such as group insurance.

Life insurance companies aren't happy with the concept, though. They make money when seniors drop their coverage, lose or forget to pay the premium on their policies, or when no-one remembers to cash in the policy on death. Companies and/or investors who buy these policies via life settlements aren't going to lose them or forget to keep the premium payments current.

So what are the potential downsides for the consumer?

1. The terms are everything. In the hand-waving that accompanies such deals, it can be hard to identify transaction fees and commissions that can make all the difference.

2. There are snakes in the grass. Check out any companies with whom you might consider taking this step. Your state insurance commissioner is a good resource, and for securities brokers, the Financial Industry Regulatory Agency offers a broker check service.

3. Your descedents could be very upset, especially if they expected the insurance to repay other expenses paid on your behalf.

4. If you plan to buy new life insurance coverage to replace what you've sold, you might find it impossible, or very much more expensive.

5. You may owe taxes on any amount in excess of the premiums you've paid.

6. The income could affect your eligibility for some social services.

7. The price could be much better tomorrow. Perversely, the better your health prospects, the less you'll receive for your policy. In the 1980s, investors were buying up life insurance from those suffering from AIDS, never expecting that medical advances would allow them to live far longer than projected. The investors lost a lot of money, and have become much more leery of medical advances. However, if the swine flu were to turn more deadly, your policy would increase in value.

Like reverse mortgages, life settlements could offer a way for the elderly and/or ill to access their estates while still alive. However, these are not trivial transactions, and if you aren't in a position to think clearly and thoroughly about them, find someone you absolutely can trust to help you.

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