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Betty's Corner

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Should You Sell Your Life Insurance Policy?

US News and World Report.

By PHILIP MOELLER | Selling a life insurance policy to generate current income has historically been a controversial practice. Investors who buy the policies do not make money until the selling policyholder dies, creating a death-watch dynamic that is morally repugnant to critics. The life settlements industry, as it's now called, accurately notes that such settlements have long been an acceptable estate planning tool. Now, with rising numbers of aging seniors, companies and brokers involved in life settlements are seeking acceptance of selling a life insurance policy as a mainstream retirement tool alongside annuities, long-term care, and other age-related financial products.

"A life settlement, in our view, is a legitimate transaction made in the financial interest of the policyholder," says Michael McRaith, the commissioner of insurance in Illinois and an active regulator in national life settlements issues. There can be valid estate considerations or a change in family circumstances that support the need to sell a life insurance policy, he notes. For example, he said, parents who have had life insurance policies for decades may no longer need or desire to leave death benefits to their grown children. "It might be better for the parents to have access to a cash settlement for that policy," he said.

"The most important concern for a consumer in any insurance transaction is that the consumer make an informed and educated decision," McRaith says. And that decision, he emphasizes, "should be in the best interests of their families and not necessarily in the best interest of the person [or firm] who is involved in the commercial aspect of a life insurance transaction."

Life settlements emerged from obscurity in the wake of the AIDS epidemic. Known then as the viatical settlements business, it layered a money-making objective with a compassionate twist for terminally ill AIDS victims, who could receive income before they died by selling life insurance policies. The investors who became the new beneficiaries of those policies would continue making any premium payments and then collect on the policy when the patient died.

Questions arose about the propriety of inducing AIDS victims to buy life insurance, and there were ghoulish odds posted on the correlation between a patient's blood cell counts and their expected time of death. Later, as improved drug therapies began commuting what had once been an AIDS death sentence, the viaticals business became less attractive to investors as life spans stretched from months into years, and then decades.

More recently, the image of life settlements was hurt by its association with what came to be called "stranger originated life insurance," or STOLI for short. In STOLI transactions, brokers often aggressively hustled older seniors into agreeing, for a fee, to have insurance on their lives purchased by third parties, who would pay the premiums and collect the death benefits. "These abusive STOLI practices essentially promote the wagering on human life, negating the good, social purpose upon which life insurance is based," the American Council of Life Insurers says in explaining its opposition to such "manufactured transaction."

In Illinois, McRaith recalled a full-page ad in The Chicago Tribune inviting people between the ages of 55 and 85 to meet a celebrity and learn about free insurance. Once in the meeting, they were encouraged to participate in a STOLI transaction. While the fee income was appealing to many seniors, McRaith said, there often were adverse financial consequences that were not disclosed, including income tax obligations and the loss of public benefits due to the extra income from their STOLI fees. Life insurers also object to selling policies with a 100-percent certainty of having to pay death benefits. Traditionally, many life insurance policies are dropped before the covered person dies, and life insurance premiums reflect these lapse rates.

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