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Second life Featured

11:13am EDT December 20, 2004
A 79-year-old Cleveland businessman had a universal life insurance policy with a face value of $2.5 million. In early 2004, he decided he no longer needed the policy for estate-planning purposes, but the surrender value was only $19,000.

Instead, he sold the policy on the secondary life insurance market for $705,000.

Similarly, a 67-year-old physician was diagnosed with cancer. He had a life insurance policy with a death benefit of $801,000, but he needed the money now so he could retire earlier than planned.

The surrender value was only $78,000, but by selling the policy on the market, he received an offer for $363,000.

It's for reasons like these that some successful businesspeople are turning to the secondary insurance market, where investors and institutions purchase your insurance policy. Changing financial needs can make policies purchased years ago obsolete, but there may be significant amounts of money tied up in them.

"You can stop making payments on the policy, and it will eventually use up all the cash and die, or you can go back to the insurance company for the cash surrender value," says James Cavoli, CEO of Solon-based Life Settlement Insights, a firm that specializes in helping people sell off their unneeded policies. "The third way to dispose of a policy is to bring it to a broker."

The broker will take the policy and offer it for sale, usually to institutional buyers such as AIG or Berkshire-Hathaway.

"I recommend selling to institutions because they are the best run and the most rational with their offers," says Cavoli. "Buyers will offer you a lump sum of money for your policy. The buyer will then take over the policy and assume the responsibility of making premium payments, and will eventually collect the death benefit."

Calculations are made based on the discounted future value of the death benefit. The biggest factor is how long it will be before the policy can be collected. Sellers can expect to sign waivers for the buyer to examine health records. Once a value estimate is determined, an offer is made. If accepted, closing documents are issued.

"It looks a lot like a real estate transaction," says Cavoli. "There are a bunch of legal documents to sign to enact the transfer. It's roughly the size of a home mortgage transaction, and all the documents go into escrow with a closing agent who is not involved."

The money from the buyer is held in escrow until everything clears. The buyer also has 15 days to rescind the purchase.

"If the person should happen to die in that 15 days, the insurance money goes to the family," says Cavoli. "It also provides an opportunity for the seller to evaluate the documents and get comfortable with what they have just done. They can rescind out of the deal if they want."

Offer values are fairly simple. If a company thinks you are going to die soon, the offer will be higher. If you will live a long time, the offer will be lower.

It takes 30 to 60 days to go from application to getting an offer. Most offers typically are four to five times the surrender value of the policy.

"A life insurance policy isn't much different than a bond," says Cavoli. "It's an agreement to make payments over a certain period of time, and at the end, you get your principle back. You can sell your life insurance just like any other financial instrument."

How to reach: LSI, www.lifesettlementinsights.com.