Everyone could use a little more money, but needing that cash desperately and in a hurry leads to a lot of mistakes.
The typical mistakes involve payday-advance loans, tax-refund anticipation loans, and more,but one big concern for senior citizens in need of cash is the "life settlement."
NASD issued an "investor alert" this month warning about the potential dangers in trading a life insurance policy for cash.
Life settlements - sometimes called "senior settlements" - are a logical extension of a product that became popular in the 1990s, the "viatical settlement."
In a viatical deal, the person giving up the insurance policy typically is ill and has a short life expectancy; he or she is taking a lump sum now and giving up insurance coverage because the end of life probably is within two years and he or she needs the cash to ease the time remaining.
Life settlements are similar, but they are targeted at folks who are not terminally ill, just old enough so that their life expectancies generally would fall in the 2-to-10-year range.
The life-settlement provider may hold the policy it buys until maturity (the death of the seller of the policy) or it may sell part or all of the policy to other investors, as varied as hedge funds and other insurance companies.
The consumer's lump-sum payment depends on a number of factors, including age, health, and the terms of the insurance policy being sold. Premiums to keep the policy in effect are paid by the purchaser, who gets the death benefit in the end.
"For some seniors, there are not a lot of places to turn if they need cash," said Ed Long, executive director of Healthcare and Elder Law Programs Corp. "But this is an idea that is sold to somebody, not something they tend to come up with on their own, and the real juice here is for the people buying the policy, not the person selling it."
Getting the cash now, instead of leaving it to your estate, is not always a bad idea, particularly if there's a strong current need for the money. But NASD officials point out that, even for people who perceive a need, the life settlement works for just a small percentage of the population.
"It might work if you have an immediate need for cash, if you are getting more from the settlement than you'd get in the policy's surrender value, if you can't borrow against the policy you are selling, you haven't got other sources of cash, and you've got a hard-core need for the money right now," said Elissa Walter, senior executive vice president for NASD. "It's being sold to a lot of people who don't really fit that kind of description."
Most industry estimates of the market for life settlements in the $5 billion to $6 billion range, but some studies - and a number of firms that have entered the business - suggest that the potential market could be 20 times larger.
The issues that the NASD wanted to provide help with include:
•Costs: Commissions on these deals can run as high as 30 percent. If the ultimate payoff is less than the surrender value of the policy, the consumer should just give up the policy for the surrender money.
•Figuring out a fair value for the policy: A licensed life-settlement broker can present multiple offers, but experts suggest that most consumers take the first deal they are offered.
•Tax implications: For some people, the lump-sum payment is taxable. In addition, that payment can cut into some people's ability to participate in certain state or federal public assistance programs, most notably Medicaid.
•Continued insurance needs: Sometimes, the consumer is selling one policy but using the proceeds to buy another.
But because the first policy remains in force, it could affect the consumer's ability to get new coverage. And given that the person trying to buy the policy has a relatively short life expectancy, the coverage available is likely to be pricey.
Charles Jaffe is a senior columnist for Marketwatch