Seller Beware
Understand your situation fully before selling your life insurance policy.
By Bob Barry, CFP

You may have seen the advertisements in newspapers or online: "Healthy seniors, sell your outdated life insurance policies for cash!" These senior settlements, sometimes called "life settlements," may sound enticing, but before taking up these offers, consider your options carefully.

What exactly is a senior settlement? You've probably already heard of its older cousin, a viatical settlement. That's when someone with a life expectancy of less than 12 months sells his or her life insurance policy to a third party for cash at a percentage of the policy's face value — perhaps 50 percent to 80 percent. In return, the new owner of the policy pays the premiums and collects the death benefits when the insured dies.

Senior settlements operate on the same principle, except that the seller is typically age 65 or older and is seemingly healthy. However, it's a misconception that "healthy" seniors can sell their policies. Rather, the investors who buy these policies (usually investment companies) look for seniors with shorter-than-normal life expectancies.

If you decide to sell a life insurance policy through a senior settlement, don't expect to receive the same percentage of face value as you might for a viatical settlement. The discount is much greater because you'll presumably live several more years. You're more likely to get only 20 percent of the face value in cash, depending on your age and health and the value and type of policy (e.g., whether there is a cash value in the policy).

Nearly any type of life insurance policy will qualify — term, universal, key life insurance at a business, or insurance inside an irrevocable life insurance trust. However, most companies are interested only in policies worth $100,000 to $250,000 or more.

You originally bought the policy for its death benefits, so why would you consider selling it for cash now? Maybe you no longer have a beneficiary who would need the benefits when you die, or maybe you have enough assets in your estate to take care of their needs. Policies bought for business purposes, such as buy-sell agreements or for a key person, may no longer be needed. You may have bought the policy for a need that no longer exists, such as paying for estate taxes. Perhaps you can't afford the premiums, such as on a term policy, and the policy will lapse if you don't sell it.

You may want to sell the policy and use the cash to buy a better policy or buy a long term care policy. You even may want to donate the cash to charity or family or use it for medical bills or travel. Whatever your reason, consider these issues first:
	Be sure you no longer need the policy for the original reason you bought it. Someone close to you still may need the death benefits more than you need the cash now.
	If you want to sell the policy with the intention of buying another life insurance or long term care policy, be certain you qualify for that new policy before selling your current one.
	Consider cash alternatives, such as taking out a policy loan or borrowing from a bank, using the policy as collateral.
	Be aware that creditors can claim the sale proceeds, and you might lose public assistance benefits such as Medicaid because of your influx of cash. Also, be aware that your medical records will be passed on to a third party.
	Unlike proceeds received by the policy's beneficiary at death or from a viatical settlement, a portion of the proceeds from a senior settlement can be subject to taxes.

Finally, be very careful if you are considering investing in someone else's life insurance policy, which is usually done through a broker. This area has a history of fraud and is never a guaranteed investment.

Bob Barry, CFP, is the president of the Financial Planning Association. He also heads his own financial-planning firm, Barry Capital Management, in Hackettstown, N.J.