Wall Street firms are waiting for people to die so they can get their life insurance money. Yes, it’s legal — and you can sell your policy, too

A life settlement is the sale of a life insurance policy that you own to a different entity than the company that sold you the policy. That party then pays the premiums on your policy, and when you die, it receives the benefit.

Here’s how this business came about, the reasons some people decide to sell and what to look out for if you’re considering a life settlement.

Viatical settlements and the AIDS epidemic

The life settlement industry began at a tragic time in American history. In the 1980s and ’90s, the AIDS epidemic saw hundreds of thousands of Americans die, with a devastating impact on queer communities and gay men in particular.

NPR’s Planet Money podcast spoke with Scott Page, a pioneer in life settlements, who began a business helping people who were dying of AIDS to sell their life insurance policies.

Page’s own partner, who had AIDS, had a life insurance policy and the couple, struggling financially, couldn’t afford to pay the premium. A wealthy benefactor, who had been impacted by people in his life dying of AIDS, helped the couple by agreeing to pay the premiums, if Page paid the money back after receiving his partner’s death benefit.

This was the impetus for what became his business: helping other people with AIDS, who were in desperate need of money, to sell their policies, a practice that became known as viatical settlements. Other companies entered the fore as well.

With the rise of antiviral drug treatments for HIV, the business of viatical settlements waned. A wave of companies then emerged that offered life insurance policy buyouts not for terminally ill people, but for older adults, known as “life settlements.”

Selling your life insurance

Depending on the type of life insurance policy you have, if you no longer want or need the policy, you may have the choice to either let the policy lapse or surrender it for its cash value, according to the Financial Industry Regulatory Authority (FINRA).

A life settlement offers a third option of selling your policy to a third party, who agrees to pay the premiums going forward, in exchange for a lump sum that’s usually more than the policy’s cash-out value but less than the death benefit. When you eventually pass away, that third party will receive the death benefit.

Companies that buy life insurance policies typically either “hold the policies to maturity or resell policies — or sell interests in multiple, bundled policies — to hedge funds or other investors,” FINRA says.

Some situations where an individual might consider selling a life insurance policy include: they are unable to pay the premiums, they are overinsured and no longer need the policy, they don’t have heirs or anyone they are supporting, or they don’t have enough money to cover retirement needs.

According to FINRA, while most states regulate life settlements, and variable life insurance settlements are regulated by FINRA and the Securities and Exchange Commission, “not all life settlement transactions are regulated.” So it’s important to do your homework and check whether a life settlement firm is regulated, or needs to be licensed, by contacting your state insurance commissioner.