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If you've heard anything about the life settlement industry, it's probably because of deals that went wrong.

Life settlement is the practice of selling your life insurance policy for cash to investors who continue paying your premiums and who collect the death benefit when you die.

The practice has been around for a few decades, but it gained notoriety starting in the mid-2000s after hedge funds became big investors, wealthy people began buying policies specifically to flip them and many individual investors got burned by people who hung around much longer than their life expectancies suggested.

Here are just some of the cases that made headlines:

  • Talk-show host Larry King sued an insurance brokerage in 2007, saying he was paid too little for the $15 million in policies he sold and wasn't told how tough it would be to get affordable replacements.
  • The widow of a wealthy Manhattan lawyer sued after learning her late husband bought $56 million in life insurance coverage and quickly sold it to investors. She argued the death benefits should have come to her.
  • An 81-year-old man in Los Angeles sued his agent, an insurance company and a bank after he said he was persuaded to pay $690,000 in premiums for a $6 million policy, only to find out there were no investors who wanted to buy it.

Image: Liz Weston

Liz Weston

The idea of giving strangers a financial interest in your death may strike you as kind of creepy. But life settlement is a legitimate option for older people who have policies they no longer need, said Darwin Bayston, the executive director of the Life Insurance Settlement Association, an industry trade group.

What's your policy worth?

"So much of our senior population is just not prepared for retirement," Bayston said, noting that selling unneeded life insurance policies could be an alternative to selling a family home or using a reverse mortgage to tap the home's equity for cash. "Maybe their policies have value. . . . They can take a look at it and see what it might be worth."

The answer could be: not much. The recent boom in life settlements ended with the 2008 financial crash, which wiped out most of the market for what Bayston calls "manufactured STOLI," or stranger-originated life insurance, that was taken out by rich, healthy people to sell for a quick profit. Changes in life-expectancy tables -- actuaries figured out we were living longer -- dealt the industry another blow.

Today, most of the business involves policies owned by seniors in poor health, and "it's a buyer's market," said Glenn Daily, a fee-only insurance consultant who evaluates policies for investors and sellers.

The institutional investors that buy most policies -- big banks, pension funds, hedge funds, even life insurance companies -- are looking for a sizable expected return, typically in the range of 15% to 20%, after accounting for the policyholder's life expectancy and the cost of future premiums. Broker commissions and other costs further reduce the potential payout to sellers.

Often, Daily said, "people are disappointed."

"They think there's this pot of gold they can take advantage of," said Daily, who evaluates individual polices for a $1,895 fee. "They find out their policy is worth 10 cents on the dollar, or you go through the work (of trying to evaluate its worth) and it's worth nothing."