Article : When Life Insurance Is More Valuable as Cash

By CHARLES DELAFUENTE
Published: March 3, 2010

THE children are grown. Each spouse — or a surviving spouse — has enough assets to last a lifetime. Yet a life insurance policy is still in force. It could be used to make gifts to those children now, a down payment on an inheritance, in effect.

Or, in another case, an older person with such a policy needs the money it represents not for heirs but for personal needs — perhaps to pay for long-term health care, to travel or just to make ends meet.

A life insurance policy is a financial instrument, an asset. Like all other assets, it has a value. There is not just the face value — what it will pay at the owner’s death — but some lesser amount that a buyer may pay in order to collect the face value when the insured person dies.

The concept of selling rights to life insurance policies first appeared in the late 1980s, as the AIDS epidemic mushroomed. Some patients lost their jobs; others needed extra funds for medical treatment. Selling a life insurance policy could give someone with AIDS cash quickly.

Buyers of such policies sprang up, attracted because they believed most of the sellers had short life expectancies.

As AIDS was transformed from an almost-certain death sentence to a chronic disease, at least for many people in the United States, the need for such patients to raise cash for medical treatment subsided. And the market for such policies shrank as life expectancy rose.

But another category of people were willing to sell, those approaching their 70s, and there remains a pool of buyers. The sale of a life insurance policy is known as either a viatical settlement, if the holder is not expected to live more than two years, or a life settlement. They have different tax consequences, but the concept behind the two is similar, according to Gloria Grening Wolk, who has written three books on the subject, including “Cash for the Final Days” (Bialkin Books, 1997). ...

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