Life insurance settlements have created a "buzz" recently, so here is a quick summary of what is involved.

A life insurance settlement would occur if you sold your policy to a third party. Why would you do this? Initially, the reason for doing this was to provide cash for medical expenses for a terminally ill policyholder. The thought being that cash now is more important than cash after the policyholder dies. This type of transaction is called a viatical life settlement.

Over the past few years, this practice has expanded to the sale of a policy for any reason. This might occur if someone were planning to let a policy expire because it was no longer needed. Rather than surrender the policy to the insurance company for the cash surrender value, policyholders now have an option to sell the policy to an investor for considerably more. Even term insurance policies that carry no cash value can be sold. This is because most term policies can be converted to whole/universal life insurance policies, which then can be held until the insured dies.

A growing marketplace has developed for life settlements, and there are now quite a few large investors actively purchasing policies. What kind of money are we talking about? Where did this market come from? Why are investors willing to buy policies? What policies do they find attractive? These are good questions, but the answers are a bit complicated. Here is the short version...

What kind of money are we talking about? Deloitte Consulting LLP has estimated that the senior life settlement market will grow to over $100 billion. Recently, a 78 year old man sold a $1,000,000 universal life policy to an investor for $100,000. If he had turned the policy back to the insurance company, he would have received the cash surrender value of $15,000. The $100,000 is his to do as he wishes.

Where did this market come from? Consider that less than 10% of all life insurance policies ever pay a death benefit. There are a lot of reasons for this of course, but it nevertheless creates a possible opportunity. For example, if life insurance companies have factored this low claims payment cost into their pricing, then keeping a policy until death might be a good financial move for your estate (if you can afford to pay the premiums). Apparently, that's how investors see it anyway.

What policies do investors find attractive? The most common policies involved in life settlements are universal life, whole life, and convertible term life. A term life policy has value only if the option to convert to universal life is still available. This is because the intent of the sale is to keep the policy in force until the death claim is paid. There are definitely no hard and fast rules for life insurance settlement transactions. As a quick rule of thumb, the best opportunities are available for policies over $250,000, with the age of the insured over 70.

If you are over age 70 with a life insurance policy that you no longer need, find out its value before you let it expire.