Selling Your Life Insurance? Proceed With Caution

People who are terminally ill have another avenue for getting needed cash. Most life insurance policies—term and cash value—now include a rider called "accelerated death benefits." This option allows you to tap into your death benefit early and use the money tax-free. Ultimately, the death benefit is reduced by the amount borrowed, plus some additional fees.

You can request accelerated death benefits by contacting your insurance company. Typically, the company will ask you to provide documentation of your health condition. Exact requirements vary, but generally you must have a life expectancy of less than two years.

When evaluating options, Bennett recommends involving adult children in the discussion. "A son or daughter may offer to help with expenses in order to keep a life-insurance policy in force, thereby preserving the value of the policy," he says. "Often, that makes the most sense for everyone financially, since the life insurance money may ultimately be needed for future parental expenses or estate-planning purposes."

Do Your Homework

If you do decide to proceed with a life settlement, do thorough research. "Call your state insurance department, and make sure everyone you're dealing with is licensed," says Thomas R. Sullivan, commissioner for the state of Connecticut Insurance Department. "Find out whether there have been any consumer complaints."

It's also important for you to understand the rules governing life settlements in your state. Many states have adopted model standards from the National Association of Insurance Commissioners or the National Conference of Insurance Legislators. Policy owners sometimes have the option of returning their life settlement and reinstating their life-insurance policy within 30 to 60 days.

Sullivan also urges you to consult with a financial or tax adviser: "Life settlements are a big decision," he says. "You need to understand all the implications for you and your heirs before moving forward."

For more information about planning for long-term care, visit www.aarp.org/decide. Decide to plan now for long-term care, create a plan that works for you, and share it with your loved ones. Let AARP help you Decide. Create. Share.SM