Selling Your Insurance Policy if You’re Dying

When John Jones bought a life insurance policy, he thought it would help his family get by if he died suddenly. Now Jones, whose name has been changed for publication, is dying of AIDS. Costly treatments and his frequent illnesses have left him jobless and broke.

If Jones wanted to tap his life insurance policy for money, he would normally have to surrender it or borrow against its accumulated cash value. And generally speaking, the cash value is a fraction of the death benefit.

However, as the AIDS epidemic has spread, a new industry has sprung up to cater to--and capitalize on--the financial woes of terminally ill individuals like Jones. The companies, which call themselves “living needs benefit” or “viatical settlement” firms (“viatical” comes from the lexicon of religion and pertains to last rites), offer cash for life insurance policies that have substantial death benefits and are owned by individuals who have less than one year to live.

Although it may sound ghoulish, people like Jones say this is a needed service that allows them to live out their remaining months with some modicum of financial security and dignity. However, insurers, industry experts and even some life benefits companies acknowledge that there are many real and potential problems with the process.

The way the system works is relatively simple. Individuals with a terminal illness can offer to change the named beneficiary on their insurance policy. They would do this because the new beneficiary--who is probably not a friend or a relative--would pay cash for the right to get the policyholder’s death benefits.

To change beneficiaries, the insured must get written permission from previous beneficiaries. (It is also advisable to consult a financial adviser and an attorney to ensure that you are both financially and psychologically prepared to make this change.)

The policy buyer would then check the record of the insurance carrier and the medical records of the seller. To put it bluntly, the buyer wants to make sure that the policyholder is going to die soon and that the insurer is going to pay quickly.

If satisfied that both these requirements will be met, the buyer will pay an amount that usually equates to between 50% and 80% of the promised death benefit, said David Zeiger, president of LifeCare, a living benefits company headquartered in San Diego. Usually, the longer the life expectancy, the smaller the payment.

The problems start with the fact that this is a fledgling industry. Although a few big insurers have launched programs to provide accelerated death benefits to their policyholders, many of the players are not insurers at all.

They are private firms and investors who operate with little, if any, regulatory scrutiny. A few states have formulated strategies to regulate these firms, but many have no process to ensure that shady characters are kept out of the industry and that policyholders are given an even break.

That leads to tremendous disparities between firms and opens the door to potential abuses.

How do you protect yourself if you need an accelerated death benefit?

- Before you sell your policy to a private individual or company, ask your insurer if it provides the same or a similar service. Although the programs are still relatively rare, some major companies--including Prudential Life, John Hancock and Travelers--do have them.

There are a number of benefits to dealing with your own insurer. Most importantly, it can often provide the money faster and pay substantially more for your policy. Prudential, for example, says it usually pays upwards of 90% of the face amount of the policy within days of receiving a completed application.

- If accelerated death benefits are not available through your insurer, you should investigate any non-insurer you deal with carefully. Call appropriate state and consumer watch groups, including Better Business Bureau, the Department of Corporations and the state Department of Insurance, to ensure that the company does exist, is licensed and is not accused of serious wrongdoing.

- Find out if the company you deal with has cash on hand or if they just go out and raise money to buy your policy after you agree to sell it to them. That can affect both the time it takes to complete the transaction and how much you’ll get for your policy.

- Get a written contract that guarantees you a set amount for your policy.

- Don’t give anyone the policy without getting your payment in cash, cashier’s check or through an irrevocable wire transfer.

- Before you start, get a good idea of how long it will take to get your money. Some say they provide accelerated death benefits within days of receiving applications, but others take months.

- Find out where their money is coming from. Many of these firms are privately owned and won’t divulge their funding sources. That should trouble you.

Keep in mind that even the best medical diagnosis is an estimate. You could beat the odds and recover or live much longer than anyone anticipated. In such an instance, you would want to be certain that you didn’t sell your policy to “some group from Las Vegas,” said Joseph Belth, editor of an industry newsletter called the Insurance Forum.