Interesting article on the business of life settlements and vaticals from the New York Times. The NY Times writes that an older person with such a policy needs the money it represents not for heirs but for personal needs — perhaps to pay for long-term health care, to travel or just to make ends meet.

The story briefly mentions using a reverse mortgage to access cash:

Jonathan D. Pond, a financial planner in Newton, Mass., said selling a life insurance policy before death can sometimes make sense. “If you really need the cash, it’s certainly worthwhile to consider,” he said.

Mr. Pond counsels clients in need of money to first “look for other sources of cash,” likehome equity loans, reverse mortgages and the surrender or loan value of whole-life insurance policies. But the typical policy, he said, reserves a substantial amount as a death benefit, even after a surrender, so the holder may not be able to get as much cash as a buyer would pay.

That payment depends on a variety of factors, said William E. Massey, senior tax analyst at Thomson Reuters, including “age, gender, health, life expectancy, type of policy and its cash value,” if any. If a policy is not already paid for in full, the buyer typically takes over the payments.

The amount of money a seller ultimately receives may be affected by tax laws. Viatical settlements are not subject to income tax, Mr. Massey said, but life settlements are, and the amount depends on whether the policy has a cash value. He suggested that a would-be seller consult a tax professional to determine what the tax on a proposed sale or surrender would be, and which would be more beneficial.

When Life Insurance Is More Valuable as Cash