Money for your life (insurance): selling a policy for cash is not as unusual as you might think.

• Author: Morton, Heather

[ILLUSTRATION OMITTED]

Sally, who suffers from breast cancer, decided to sell her life insurance policy to investors to pay for her growing medical expenses. She got $250,000 for it, which she used to buy medicine. The investors will receive her $500,000 death benefit when she dies.

Many people might be surprised to learn that a life insurance policy is an asset that can be sold. But such transactions can be arranged through a broker who works on behalf of the policyholder and solicits multiple bids, or a provider that represents a single firm interested in purchasing the policy. The investors are typically hedge funds and financial institutions.

There are restrictions on such transactions. For example, a person can legally sell a policy to a third party for more than the "cash surrender" value, the dollar amount set by the insurance company if the policy is voluntarily terminated before it matures. But it must sell for less than the policy's death benefit.

Such a sale is called a life or viatical settlement, which goes back to a Latin term that refers to providing a stipend or living expense. For more than 130 years, the U.S. Supreme Court has held that a life insurance policy is an asset that, acquired for valid reasons, can be sold to a third party. The viatical settlement business developed in the 1980s and 1990s as AIDS patients and other terminally ill patients sold their life insurance policies as a way to pay for their health care. As advances in medicine increased the life expectancy for people with AIDS, the market changed its focus to senior citizens who no longer needed their life insurance policies. As the emphasis changed, the terminology changed from viatical settlements to life settlements.

"Consumers are, in these difficult times, frequently faced with significant challenges in planning," says Doug Head, executive director of the Life Insurance Settlement Association. "Perhaps they have been oversold on insurance or had expectations of greater assets than now seem realistic. A life settlement is both logical and appropriate for some consumers."

STATE ATTENTION

The increase in people buying life insurance policies specifically to sell to others, however, is what has garnered the attention of state legislators and insurance regulators. The life settlements industry has grown from $2 billion in 2001 to $16 billion in 2008. When a person applies for life insurance and has already agreed to sell the policy to someone else in the...