Early comfort from life insurance

A well established US practice that enables the terminally ill to sell their policies for cash is slowly taking on here. Stephen Ellis reports

TRADITIONALLY, life insurance has been used to provide for the financial needs of the policy holder's dependents when he or she dies. The policy holder never benefits directly.

But people's circumstances change. Divorce or death may mean that there are no longer any dependents to worry about. And individuals with terminal illnesses often face massive bills to provide them with care and comforts in their remaining lifetime.

If this is the case, turning a life policy into cash can be a very attractive proposition.

Most people are aware of the traded endowment market in Britain, where you can sell your endowment policy before it matures and receive a bigger payout than you would have by surrendering it to the insurance company.

However, very little is known in this country about what is called "viatical settlement" - where someone with a terminal illness is able to sell their ordinary life policy for cash that can then be used to make the last few months of their life that much easier in financial terms.

This is already big business in the United States, where more than $300m (£190m) worth of policies are reckoned to have been sold in this way during the past year.

So far, however, differences in the rules governing insurance companies have prevented the development of this business in Britain. While American insurance companies are compelled to pay out on any life policy that has been going for more than two years, UK firms can contest payout at any time.

Bill Weston, a partner at auctioneers Foster & Cranfield, says the contestability question is an important one. "American policies are easier to sell because there is an effective guarantee that a policy can be legally assigned. We were recently able to get $90,000 for a policy with a $100,000 face value for an American man who had been told he had one year to live."

While more than nine out of 10 of the policies sold in the US last year belonged to people with Aids, the British experience is very different. Life Benefit Resources, which is the only British company concentrating solely on the viatical market, says around half the 400 policies it has bought were from cancer victims. And companies in continental Europe and the US say they are beginning to get requests from an increasing number of people with heart problems.

Richard Legg, managing director of Life Benefit Resources, says there are other considerations for people in the UK who might be interested in selling their life policies.

"It is important to look at the possible impact on state benefits of a payout," he points out. "Those with low-value policies should be particularly careful. In addition, it is important to note that the Inland Revenue says it will tax any proceeds of a sale of a life policy as if they were income."

Until the situation is clarified, the market in UK-based policies will remain limited. But there is already a UK market in American policies. Jonathan Berkeley-Kaye, 31, is the leading Briton involved in the viatical settlement business, having bought some $50m worth of US life policies on behalf his clients.

"Most investors are only interested in American policies because of the contestability problem," he explains.

Mr Weston adds that this is why he is generally looking for policies that were in existence long before the diagnosis of the terminal illness was made.

"As far as investors are concerned, the returns on buying this sort of policy should be a couple of points better than they would receive by buying a similarly dated gilt," he says.

But Mr Berkeley-Kaye believes no one should become involved unless they are willing to buy a portfolio of policies, which means an investment of at least £200,000.

One way round the tax problem for UK policy holders with limited life expectancy could be the early settlement or "accelerated benefit" now offered by some insurance companies.

For little or no extra you can have a terminal illness clause added to a life policy that will pay out the full death benefit if you are diagnosed as having less than a year to live.

According to a Legal & General spokesman: "Our experts have discussed early settlements with the Inland Revenue who say such a payout would be treated the same way as a payment on death, so there would be no liability to tax." Unfortunately, the terminal illness clause is only available on new policies - and not all insurance companies offer it even then.