Q: I heard you can sell a life insurance policy to get cash before you die. Is this true and if so, how does it work?

A: What you are referring to is called a life settlement or a viatical settlement, which allows someone to invest in another person's life insurance policy. Charles C. Corwin, CLU, of The Bryton Companies in West Des Moines, is one of a handful of licensed viatical brokers in Iowa and joins Your Money Team this week to provide an expert opinion on this subject.

The market for this legal type of insurance transaction first grew during the AIDS epidemic of the 1980s, when many terminally ill individuals sold their policies at a discount in order to obtain funds. Corwin points out that a when an insured has a life expectancy of 2 years or less, this type of arrangement is called a viatical settlement and when an insured’s life expectancy is in the 13 to 18 year range, they are referred to as life settlements. Still somewhat unknown, life settlements are becoming more popular with the general public.”

How does it work? In general, the buyer purchases the policy, or a portion of it, at a discount to the actual death benefit stated. When you — the original policy owner, or seller — pass away, the buyer collects the full death benefit.

Corwin says, “Rather than cashing in a policy that is no longer needed, it makes sense to have it valued in the secondary market.” He notes that life settlements are not for everyone, but in those cases where an offer is made, the payment is between 20% and 80% of the policy’s face value, which is considerably higher than the Cash Surrender Value. For example, Corwin says, if your policy's death benefit is $1 million, a purchaser may pay $200,000 to $500,000. Term policies (convertible and over two years old) can bring $4,500 for a $250,000 face amount when sold by a 70 year old insured.

What are some of the requirements for the successful sale of a policy? Corwin advises that the policy “should have a $250,000 minimum face amount and that $500,000 is better.” The seller should be at least age 65 with a life expectancy of 13 years or less. If there has been a change in the policy owner’s insurability since issue, that is an attractive feature, as is a low cost to carry the policy. If the owner is an individual, trust, or corporation, there are better chances of a successful sale.

How is the sale price determined? The factors settlement companies consider in determining the purchase price of a policy include the age, health and estimated life expectancy of the insured, the cash value of the policy, the face value of the policy, outstanding loans and the premium payments.

Who are the buyers for these policies? The State of Iowa requires licenses from the viatical settlement providers. There are currently 13 companies registered to do business in the State.

For whom might this be inappropriate? While they are becoming more common, a life settlement should not be entered into lightly. If a senior in declining health is considering a settlement because they cannot afford the continued premiums, they may want to look to other ways to continue the insurance.

As with any financial decision, Your Money Team recommends that you consult with your financial, tax, insurance, or legal advisors before considering a life settlement or viatical settlement with your life insurance policy.