Many of our parents purchased significant life insurance policies when their families were young. Their children are now grown, they may be widowed, and the original reasons for buying the policy may no longer exist. Yet the premiums continue, and our parent may be having a hard time affording the costs of aging care.

While they certainly aren't right for everyone, and we're personally a little squeamish about the whole idea of selling "death benefits," life settlements have recently become an accepted way for certain people to generate operating money from life insurance policies in excess of the cash surrender value.

A Life Settlement is a lump sum payment made either by an individual or an investment group to someone with a life insurance policy. In exchange, the person or institution becomes the beneficiary of the policy. They continue to pay the policy premiums. When the insured passes away, as the beneficiaries of the insurance, the person or group who purchased the policy receive the full amount of the insurance.

The original owner of the policy usually receives several times what the policy cash surrender value would be if the policy were turned back to the insurance company, but less than the full death benefit would be. The original insured no longer has to make any payments to keep the policy in force.

The amount that someone would receive for their policy depends on the cost of premiums, the age of the original insured and that person's health condition. The older the original insured, and the more health problems that person has, the more value the policy has to someone who might purchase it.

The shorter the life expectance of the insured person, the more value the investment has because a short life expectance means fewer premium payments and a quicker payout from the insurance company. This is the part that makes us squeamish. Whoever buys the insurance policy obviously has a vested interest in deth occurring sooner rather than later.

However, if your parent is extremely cash-strapped, and you are not hoping for a large windfall from any life insurance, then a life settlement is sometimes a solution worth at least investigating.

Typical criteria for the owner of a life insurance policy to become an eligible candidate for a life settlement transaction usually include

Policy holders age 70 and older (ages as low as 55 are possible but unlikely)

$50,000 minimum face amount. $100,000+ is more usual

Policy is at least two years old

Policy has a low cash surrender value

Annual premiums are less than 8%

Things to Consider About Life Settlements

If your parent will still need to provide insurance benefits for a spouse, then selling one policy and purchasing another is not a particularly good idea. At a more advanced age and with new health issues, it might be impossible to purchase another policy. Guaranteed any new policy will be considerably more expensive. Any cash generated from a life settlement will not compensate for new expenses.

It might be a better idea to consider either borrowing against the policy for immediate cash, or if your senior has a "catastrophic" or terminal illness, some policies will pay "accelerated death benefits" that might not be much different than what could be obtained from selling the policy outright.

The infusion of cash from a life settlement can have important tax consequences, so be sure to check with a good financial advisor first. If there is any possibility that your parent may need, or is now receiving, Medicaid benefits, cash from selling a life insurance policy can instantly cancel eligibility.

Privacy can be compromised. When someone puts a life insurance policy up for sale, he or she must sign a release giving the purchaser access to private medical and other information so that the purchaser can decide  how much to offer for the policy. Some purchasers require that the insured person continue to provide regular health updates. Once you have signed this release you have no control over how this information will be used or to whom it will be passed on.

Because finding a buyer and negotiating a life settlement is almost impossible for an individual to do, most people negotiate life settlements through brokers. Commissions to brokers and other professionals involved in negotiating a settlement can be very costly. Be sure to ask everyone involved how they are being compensated and whether their commission comes out of the settlement your senior will receive.

Life settlements may make a great deal of sense for a senior who is tempted to surrender or let a life insurance policy lapse. In this kind of case, some money is much better than none. If, after checking with a professional who is there to advise you and your senior only, and who will make nothing because of his or her advice, if it makes sense to consider a life settlement then keep in mind:

Deal only with licensed broker/dealers;

Be sure to get clarification about any confidentiality questions you may have;

You should never take the first offer. This is a situation where you must shop around for the best offer;

Know the tax consequences of receiving a potentially large lump sum payment.

For more information about life settlements, or if you want to file a complaint, contact your state insurance commissioner. The National Association of Insurance Commissioners has a state-by-state locator on their website.