written by A.T. "Al" Benelli, CFP, FIC |  

One of the most important decisions to make about any asset is the end game – how it will be sold or passed on. People don’t always think of life insurance as an asset, but during this tough economy, there’s more talk of various transactions that turn life insurance into cash. In some cases, these options are good ideas. But according to the Financial Planning Association of Wash. DC, it’s important to get good advice first.

Once called “viatical settlements,” the practice of selling one’s active life insurance policy to a company for cash so things healthcare costs and related expenses could be paid. Such settlements grew in popularity during the 1980s and eventually attracted some unscrupulous dealers.

Yet these sales opportunities remain for seniors, selling the policy to an investor in exchange for cash. A financial advisor or tax advisor should be consulted first to determine the value of the contract and tax treatment for the transaction, as some may be taxed and others tax free. The buyer typically takes over ownership of the contract and the payments on the policy if more payments are due. A financial planning professional can be a first step in getting you the advice you need on whether to accept any offer to buy an insurance policy. Here are some steps to consider:

Is there any other source for the cash you need? Life insurance has a purpose. It is there to protect your family’s assets in case you die. Elderly policyholders may have other alternatives home equity loans or to tap the loan value on the life insurance policy , which would leave the coverage in force. It’s important to check with a CFP® professional to weigh the pros and cons of borrowing against any life insurance policy .

Is it legal to sell a life insurance policy in your state? Unscrupulous players are forcing more scrutiny on the life settlement business in various states and Congress as well. A call to your state insurance commissioner might be a good idea as you start your investigation. Keep in mind that the life settlements business is controversial and there may be efforts underway in your state which could slow or stop your plans.

What impact will such a settlement have on your taxes? Depending on the laws in your state and your own circumstances, you might end up paying considerable taxes on the gain. Check with a reliable tax expert first.

What about your heirs? Will they need the death benefi...