Money for Your Life

It’s not unusual to look around for unused items to sell when you’re trying to come up with extra money. For some folks, that item may be their life insurance.

Why would you want to sell your life insurance policy? Think about it: Things change over time. Maybe those children you were worried about protecting are all grown up now and making more money than you are. Maybe you once worried about protecting your husband from financial stress if you died before he did. But that was before the divorce proceedings got under way.

Or maybe you and your spouse are both in your 80s and would like to have some cash for another travel getaway. Or, less happily, your medical costs are eating you alive and you need extra money.

So you may turn to a “life settlement,” a financial product that allows investors to buy life insurance policies from people who, like me, have a little gray in their hair. Life settlements provide a new way to extract value from insurance policies that have lost their original value for the holder.

If you don’t need your policy

Before life settlements came on the market, if you had an insurance policy that was no longer useful, you could either turn it back to the company for a relatively small sum (the “surrender value”) or let it lapse by ceasing to pay premiums. Life settlements have presented a third option: Sell your policy to an investor who pays you a fraction of the death benefit, but more than the surrender value.

For instance, say you were a nonsmoking man who bought $100,000 worth of life insurance when you were 35. Twenty years later you might be able to turn it back to the company for about $33,000. But an investor might be willing to pay you more. The way it works is that the investor continues to pay premiums to the issuer, hoping the eventual costs will end up being far less than the death benefit.

The sooner you die, the better the buyer does. So, yes, it’s a little ghoulish.

When the economy went south starting in 2007, there was speculation that older investors might turn to life insurance policies as a source of cash because other investments had plummeted in value. For a while, it looked as if there would be a growing market for bonds backed by life settlements, as investment groups started bundling them the same way they had previously bundled subprime mortgages to sell to hedge funds and other investors.

Goldman Sachs even set up an index that tracked the life expectancy of a group of people 65 and older who had sold their life insurance policies to an investment pool, planning to sell derivatives based on the index to institutional investors as a hedge against investments in other life settlement pools. As a result of all the activity in this market for life settlements, last year Securities and Exchange Commissioner Mary L. Shapiro created a task force to keep an eye on what risks the new products might pose.

But in the end, the market failed to grow as expected. In December 2009 Goldman Sachs shut down its index.

Finding a deal in “death bonds”