Lynn O'Shaughnessy

If you own a cash-value life insurance policy, you could have insurance agents pestering you to sell it. Behind the scenes, there are some powerful - and sleazy - reasons why some policyholders are being urged to swap their policies for cash.

Many people aren't aware that they can sell their policies, but the fast-growing life settlement industry is determined to talk as many customers as it can into relinquishing their policies. Life settlement companies buy life insurance from policy owners, take over the premium payments, then collect the death benefit when the insured person dies.

The companies entice the curious with a simple message: If you no longer need the life insurance or you can't afford the policy, we can buy it from you for more than its cash surrender value - that is, what your insurance company would give you if you decided to cancel your policy. For many people, this offer sounds a lot better than the deals that send contestants into fits of giddiness on the "Price Is Right." But is it?

Before you can possibly answer that question - which is vastly more complicated than it looks - you have to know whether an outsider would even covet your policy. A firm will take a pass if it suspects that you share Methuselah's DNA. Buyers will be more excited if your doctors predict you'll live for no more than seven to 10 years, but you still could generate some interest if your life expectancy doesn't exceed 15 years. The shorter your life expectancy, the more money you should get. The life settlement firms will expect documentation of your health from your physicians, which can cost hundreds of dollars.

Because of the costs involved in these transactions, nobody is going to get excited about a policy that has a death benefit that's worth less than $100,000. Many policies generate a purchase price of 15 percent to 30 percent of the face amount. That, however, doesn't include the brokerage commission, which can be huge.

Glenn Daily, a fee-only insurance consultant, suggests that the way in which insurance agents and life settlement brokers are rewarded for generating new business is "bizarre." Commissions, which are often 6 percent, aren't calculated on the policy's purchase price but on its face amount. So if the policy's face value is $1 million and the purchase price is $150,000, a 6 percent commission would be $60,000, not $9,000.

You don't need an economics degree to appreciate why an agent might not always be motivated to find the largest purchase price for his client when he's going to get paid the same amount no matter what offer he reels in.

Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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