Putting Your Life Policy in Someone Else's Hands

It's not, Katt says. Instead, start paying the premiums from your cash values. If you die, your beneficiaries will get the net policy proceeds. If you live, you can sell the policy a few years later when the cash values have run down. In the future, you will have a shorter life expectancy -- meaning that you will be able to sell at a higher price than you'd get today (grim arithmetic, but that's how it works).

Starting in July, you will have an alternative to life settlements. A new company, Legacy Funding Group in Malvern, Penn., will lend you money against your policy. In most cases, you will be offered at least as much as you would get by selling it and possibly more, said Larry Fondren, founder and president.

These so-called legacy loans will be funded by lenders and investors who will pay all the premiums. You owe no tax. At your death, a portion of the policy proceeds are used to repay the loan plus 9 percent interest. Your heirs get anything that's left, with a minimum guarantee of 10 percent of the money. That's clearly a better deal than a life settlement. Legacy also structures deals with potentially rising death benefits.

New York Life Insurance offers a similar loan arrangement called Access Plus to its own policyholders in 22 states and the District. In general, it's for people whose life expectancy is between one and 10 years, spokesman William Werfelman said.

Who is investing in life settlement policies? Mostly institutions, said David Kleinhandler, a New York insurance agent who specializes in this business. They buy pools of policies that he expects to yield an average of 11 or 12 percent, pretax.

He advises against this game for individuals. If the insured person lives longer than expected -- maybe because he or she is healthier than was advertised or new medications are developed -- your gains on that policy might shrink to zero. You might even have to put up more money to pay the premiums. And there's usually no way out. That's a risk the little guy shouldn't take.

Jane Bryant Quinn, author of "Smart and Simple Financial Strategies for Busy People," is a Bloomberg News columnist. Alexis Leondis in New York contributed to this column.