My last post discussed one form of betting on your death – “stranger oriented life insurance” (“STOLI”) –a practice which is illegal in Massachusetts. However, another variation of betting on your death – life settlements – is trending towards legitimacy. Unlike STOLI, which involves third party solicitation of a person to purchase then “flip” a life insurance policy, the life settlement industry focuses on persuading people who already own life insurance policies to sell their policies. Though heavily regulated, life settlements are legal in most states, including Massachusetts.
In a life settlement, a life insurance policy holder can sell rights to the payout of his insurance policy in exchange for a lump sum. Since the buyer also agrees to take on the cost of premiums upon a sale, how much a buyer is willing to pay for the policy depends in part on the cold reality of how soon the buyer thinks the seller is likely to die. In order to value a life insurance policy, prospective buyer companies do actuarial research and request medical examinations of policyholders to try to determine whether the policy holder's life expectancy will likely to be short enough to make the deal worth it. Owners of life insurance policies may be able to “shop” the policy among potential buyers various and entertain multiple offers from interested investors.
Proponents of life settlements argue that allowing people to sell their life insurance policies gives them another opportunity to lead financially comfortable and self-sufficient lives. This opportunity is especially powerful since prospective sellers of life settlements are often elderly or infirm individuals who see the sale of their policy as one of the only means available to them of generating significant funds in a short amount of time. Critics of the industry counter that a life settlement reduces the value of the assets that would otherwise be passed onto loved ones after the insured's death – funds which may be needed by the survivor. Further, life settlements subvert the traditional model of the insurance industry. While traditional insurers benefit from having their policy holders living and paying their premiums as long as possible, companies buying policies perversely benefit from an earlier death of the original policy holder. There can also be significant tax consequences for the insured which must be carefully considered.
Ultimately, the decision to sell a life insurance policy to a third party is a highly personal decision and one that may be replete with significant legal and tax consequences. Speak with a trusted elder law attorney, accountant or financial adviser before moving forward with such a sale.