Sell Your Life Policy-Maybe

Dec. 11--Selling your life insurance policy so that someone else can collect on it when you die? The thought of it is uncomfortable.Life settlements, formally known as viatical settlements, often elicit a great deal of emotion, but they might make sense if you can't afford or don't want your insurance anymore. Trouble is, the payouts usually are a fraction of the policy's death benefit.

Here's how life settlements work: A group of investors or a company buy a person's life insurance policy for less than the value of the full death benefit. When the seller passes away, the purchasers collect the death benefit (as opposed to the original beneficiaries). That's a little creepy, right?

The life settlement industry began about 20 years ago as a last resort for crucially ill patients to get fast cash for medical expenses. Now, it's an option for not only those facing health issues, but also people having financial difficulties in retirement who prefer (or need) cash today rather than leaving behind a life insurance death benefit.

A life settlement may be a choice for you if your life insurance premiums eventually become too high to maintain. Also, if you need cash for health care or any other reason.

The first step to knowing if a life settlement is a good idea for you is to examine your own financial situation, while thinking about the ultimate unknown -- your own longevity. The longer your life expectancy, the less money you can sell it for.

In trying to find some approximate numbers on what a policy might sell for, I talked with Stephen Terrell, a senior vice president at Lifeline Capital Management, an Atlanta-based company that specializes in life settlements. Terrell said the price depend on many factors, including the size of premiums the buyer pays after taking over a policy, and the health status of the seller.

Here are a few examples he gave me:

* A 79-year-old woman of above average health with a $2 million policy may receive $125,000 for her policy.

* A 73-year-old male with a $500,000 policy in excellent health is not likely to receive an offer at all. This is due to his long life expectancy and the amount of premiums required to keep the policy in force.

* Look at a similar situation: A $500,000 policy for 73-year-old male in average health could qualify for a life settlement of approximately $50,000. Someone with average health might have diabetes and a manageable heart condition, or other conditions with similar lifespan-affecting consequences. A 73-year-old male with poorer health would probably receive a larger offer, depending on his condition's severity.

As you can see, today's offer for cash is far less than the value of the death benefit. There is no reason to even entertain such an idea of selling your policy unless you absolutely did not need (or want) the death benefit for your heirs -- or you can no longer afford to continue making premium payments to keep the policy in force.

Another reason to keep your current life insurance is because even though you sell a policy, the coverage remains in force, and may affect your future insurability. If you want to replace your coverage -- either in the short or long term -- you have to work with insurance companies that are willing to write future policies, knowing the original coverage is still in effect. That can be a tricky proposition.

In full disclosure, I never in my entire career as an investment advisor had a client sell a life settlement. However, I think it is at least worth exploring here as you should know about every possible financial planning tool available to you.

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Wes Moss, CFP, is the chief investment strategist for Capital Investment Advisors and a partner at Wela, both in Atlanta. He hosts "Money Matters," a live financial advice show on Atlanta's News 95-5 and AM 750 WSB Radio. In 2014 Barron's Magazine named him as one of America's top 1,200 Financial Advisors. His book, You Can Retire Sooner Than You Think , published by McGraw Hill, is available on Amazon, iTunes and at your local bookstore.

Wes writes weekly about personal finance in the "Bargain Hunter Section" for AJC.com, the site of The Atlanta Journal-Constitution. Wes is also the editor and writer for About.com's Personal Finance blog. Connect with Wes on Twitter at @WesMoss365 and on Facebook at Wes Moss Money Matters. You can also visit his website, WesMoss.com to learn more about Wes, and take his complimentary Money and Happiness Quiz.

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