Life-insurance options broaden

Life-insurance vendors are broadening their sales pitch on a range of insurance products.

They should find willing buyers. About 50 million Americans say they need more life insurance than they now have, and 42 million of them plan to buy the insurance in the next few years, according to the Life and Health Insurance Foundation for Education (LIFE), a nonprofit consumer-education group.

While some of these products offer elderly Americans more flexibility and different types of protections, say experts, buying them might not be in most consumers' best interests.

"They need to be very aware of what they're getting into so they don't deprive themselves or their family of security," says David Woods, president of LIFE.

Over the past decade, financial services in general have become much more sophisticated. Companies have developed a new range of products for consumers who have more money and are better educated about financial management.

The most innovative example on the insurance front: life settlements.

The service, also known as viatical settlements, first became available about five years ago. It allows policyholders to sell their life insurance to one of about half a dozen third-party companies called "funders," which often sell life insurance, too.

Selling their policy lets consumers avoid paying further monthly premiums, while also allowing them to cash in on a percentage of the total value of their policy. If an individual sells a policy worth $500,000, for example, he or she might receive $210,000 in cash.

The service is available only to people age 65 and over, those with a life expectancy between four and 12 years, or those diagnosed with a terminal illness. The policy must also have a value of at least $250,000.

The upshot for those who buy in is clear: a quick influx of cash. So, too, is the benefit for funders, who often collect more than 50 percent of the policy's net worth.

The percentage of the policy's overall worth that an individual receives is determined by his or her age and overall health. Those whom the funders believe have less time to live collect more, because the funders believe they will collect on the policy more quickly.

People taking advantage of life settlements may be retirees who need an extra source of cash because of losses in the stock market, says Sid Friedman, chief executive of Corporate Financial Services, which helps individuals sell their policies to funders. Others may feel freer to sell their polices because their beneficiaries have passed away or are no longer dependent on the funds. "Everybody wins in this case," says Mr. Friedman.

But some experts say life settlements are a bad deal for consumers. Policyholders should not be quick to abandon what is many consumers' top financial investment, they say, notwithstanding that life insurance is the one investment that a policyholder can never fully gain from.

"If the owner needs cash for other purposes, almost any other asset should be liquidated instead of the life policy, as long as leaving the estate is still part of the overall financial plan," says Peter Skar, chief actuary for Mass Mutual Financial Group.

A life-insurance policy will likely have a higher rate of return then any other asset a person owns, Mr. Skar adds.

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