Be careful when your life is worth money to a stranger

I received a letter recently from a company in the viatical/life-settlement business, encouraging me to encourage my clients to sell their life-insurance policies.

Never mind that I don't have any clients - my only connection with life insurance is that I've bought it and written about it. The point is that people are marketing these deals, and you may be tempted to join one.

Be careful.

Viaticals began appearing about 10 years ago, largely a result of the AIDS epidemic, which was leaving many people dying and destitute. People could sell their policies and have a few extra dollars in their final days.

Today, however, the news is in the growth of life settlements. Under these arrangements, also known as senior settlements, the sellers don't need to be terminally ill, or even chronically ill. All they need to be is advancing in years. A viatical firm will buy the policy and either hold on to it or resell it to other investors.

Before you sell a life-insurance policy, consider these questions:

Is it good to have strangers wishing me dead?

A key insurance principle is insurable interest - essentially, the notion that one person has a high vested interest in the insured's well-being. The bar is high. A spouse has insurable interest; a cousin generally doesn't.

A person can't take out a life-insurance policy on someone else without possessing an insurable interest, for what are probably obvious reasons. In the absence of such rules, I could buy life-insurance policies on everyone in the neighborhood and essentially gamble that they die soon.

And, if I'm losing too many bets, well, there is one sure way to fix that. ("Hey, Lenny, wanna go out on the boat this weekend?")

In Washington and most other states, you generally don't need an insurable interest to buy an existing life policy. The policy is personal property and can be sold pretty much at will.

But once you've sold your policy, every day that you live costs the investor money. For one thing, he or she has to pay the premium to keep the policy in force. Also, the real value of the policy benefit - the return on investment - decreases.

Now, I should say I haven't heard of any instances of a viatical transaction leading to murder. However, in Texas a guy who spent most of the '80s in prison for arranging the murder of a family in Houston opened a viatical firm. Last month, he was convicted on charges of fraud and money laundering.

In any case, financial speculation in the death of others doesn't strike me as evidence that the species is advancing.

Can I do better through my insurance company?

If you're terminally ill and considering a viatical, read your life-insurance policy or check with the company that issued it. If it allows accelerated death benefits and you qualify, you can expect a better deal, said Joseph Belth, editor of The Insurance Forum, an industry watchdog.

However, to qualify for accelerated benefits you'll likely have to be expected to die within a year or so.

Do I know what I'm buying?

In addition to that guy in Texas, cases of fraud have been alleged in Florida. In one type of scam, terminally ill people agree to conceal their illnesses in applying for policies. The firms then pay them for their policies and resell them to unknowing investors. When the insurance companies discover the fraud, the policies become worthless.

Footnote: In Washington, the viatical industry is regulated by both the state insurance commissioner and the Department of Financial Institutions. Check with them if you have questions.

Send your questions and comments to Paul Palazzo at ppalazzo@

seattletimes.com or 206-464-2277.