It has occurred to you that you're sending a check to a life insurance company every month and you really don't need the policy. Your kids are grown and doing quite nicely, thank you, and your spouse is well provided for.

You can simply let the policy lapse. You no longer pay the premiums and, obviously, no longer are eligible for the death benefits. The downside: The money you've already spent on premiums is gone.

Or, perhaps you have a serious medical condition and need money now to cover medical or living expenses.

In either case, one option is to sell the policy to a third party, known as a viatical or life settlement firm. You then become the "viator" and receive a portion of the face value of the policy. The exact amount varies with your age, life expectancy and the value of the policy. The viatical firm owns the policy and pays the premiums. When you die, the firm receives the death benefits.

Typically, the term "viatical" is used when the individual selling the policy is terminally ill and expected to live no more than a year or two. The term "life settlements" is used when an older individual (usually 70+) who may have some health problems but still is not expected to die within the next few years, sells a policy that he or she no longer needs. These are important distinctions, as the tax implications and regulations can vary between the two.

While viaticals and life settlements aren't appropriate solutions for everyone, they can be of benefit to some individuals. However, before selling a life insurance policy, it makes sense to do some homework. That's because today's viatical industry comes with a checkered past.

Troubled life of viaticals
The industry emerged during the AIDS crisis of the 1980s, says David Sommer, associate professor of risk management and insurance at the University of Georgia's Terry College of Business, Athens.

"Suddenly, there was a large group of individuals with substantial life insurance, and they basically had a death sentence."

Many needed money to cover medical treatments or living expenses while they still were alive. In addition, many didn't have dependents who would need their policies' death benefits. It made sense to sell their policies and use the money to pay expenses.

Such transactions can be a humane option for those who need it. However, some unscrupulous people saw it as an easy way to make money.

One type of scam involves what's known as a "wet paper" transaction. Here, one person tries to convince another to purchase a life insurance policy, which then would immediately be sold to a viatical company. The term "wet paper" refers to the fact that the ink on the policy wouldn't have time to dry before it was sold.

These schemes can lead to another scam, known as "clean sheeting." Here, an individual purchases a life insurance policy without disclosing his or her true medical history. If the individual is in poorer health than the application indicates, the insurance company isn't able to make an informed decision about insuring him or her.

Clearly, transactions in which one party deceives another are unethical, and most likely, criminal. Today, most viatical firms won't purchase policies that are less than two years old. And, individuals who misrepresent their health when applying for life insurance can be prosecuted.

Contract for murder?
Even when the transaction is on the up-and-up, some industry observers express concern over what they view as an industry in which one party profits from the other's death.

"Our greatest concern is that viaticals create an incentive for murder," says Joseph Belth, a retired professor from Indiana University at Bloomington, in his book, "Viatical Transactions: The Frightening Secondary Market for Life Insurance Policies."

Doug Head, director of the Viatical and Life Settlement Association, a trade group in Orlando, Fla., notes that such speculation is just that -- speculation.

"So far as anyone knows, there's never been a murder of a viator (by the viatical firm)," he says. "Were it to occur, there would be a pretty immediate trail to the person doing the murdering."

In contrast, says Head, cases in which one person kills another to get the life insurance benefits regularly occur.

Cleaning up the industry
However, Head and others agree that some level of regulation is needed. The executive committee of the National Association of Insurance Commissioners recently adopted the latest version of the model viatical settlements regulation, says Lester Dunlap, Louisiana's assistant commissioners of insurance and chair of the NAIC's working group on viaticals.

These are regulations that the group publishes. Individual state insurance commissioners can then adopt them, modify them or come up with their own regulations.

The American Council of Life Insurers opposed the model regulations recently adopted by the NAIC, says Jack Dolan, spokesman for the Washington, D.C.-based professional organization. The model allows individuals with one year of experience in the insurance industry to facilitate transactions. "We believe additional licensing and testing should be required," says Dolan. "This is an area of specialty and should require advanced testing."

Currently, approximately 35 state governments require viatical companies to be licensed before doing business in the state. Many also have laws regulating viatical transactions, says Dunlap. One note: In some states, the laws cover only viatical transactions and don't apply to life settlements.

If you're thinking about selling your life insurance policy, you'll want to do your homework.

Signing your life insurance away
First, determine whether you still need it, says Dunlap. Will the policy's beneficiaries still need the benefits?

Once you're confident that you don't need the policy's benefits, examine all your options. Some life insurance policies now offer accelerated death benefits, says David Sommer, associate professor of risk management and insurance at the University of Georgia. These typically let a policyholder receive some portion of the death benefits while alive, as long as he or she has a life expectancy of less than one year, says Sommer. When the policyholder dies, the remaining proceeds goes to his or her beneficiaries.

If it becomes clear that selling your policy is the best option, the next step is to thoroughly investigate viatical firms. At a minimum, the firm should be licensed to do business in your state. Head also recommends that you work only with firms who belong to the Viatical and Life Settlement Association of America, as they've pledged to uphold a code of ethics.

Belth disagrees, saying that this doesn't offer enough protection. The code and enforcement of it are "empty," he argues.

You'll also want to review, with a legal professional, the regulations that govern the industry in your state.

What happens if you enter into a viatical transaction that goes awry? You can check with your state's department of insurance. The department can let the firm know that if they don't play by the rules, their license might be revoked. You also can check with the consumer division of your state's attorney general's office.

However, if your state doesn't license viatical firms, there may be little anyone can do. You can file a lawsuit, but if the firm itself doesn't have money, a lawsuit is unlikely to help you win any. That's why due diligence before you sign on the dotted line is critical.

As the viatical industry matures, it's likely that it will end up playing a niche role within the financial services industry. For some individuals, they offer tremendous benefit.

"They can provide a valuable service to those who are terminally ill and have life insurance but no need for the death benefit," says Sommer.

Others will find that it makes more sense for them to pursue other options.

-- Updated July 15, 2004