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Life-insurance options broaden

Range of policies - including life settlements, long-term care, and survivorship - calls for scrutiny by consumers

Life-insurance vendors are broadening their sales pitch on a range of insurance products.

They should find willing buyers. About 50 million Americans say they need more life insurance than they now have, and 42 million of them plan to buy the insurance in the next few years, according to the Life and Health Insurance Foundation for Education (LIFE), a nonprofit consumer-education group.

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While some of these products offer elderly Americans more flexibility and different types of protections, say experts, buying them might not be in most consumers' best interests.

"They need to be very aware of what they're getting into so they don't deprive themselves or their family of security," says David Woods, president of LIFE.

Over the past decade, financial services in general have become much more sophisticated. Companies have developed a new range of products for consumers who have more money and are better educated about financial management.

Policies that can be sold

The most innovative example on the insurance front: life settlements.

The service, also known as viatical settlements, first became available about five years ago. It allows policyholders to sell their life insurance to one of about half a dozen third-party companies called "funders," which often sell life insurance, too.

Selling their policy lets consumers avoid paying further monthly premiums, while also allowing them to cash in on a percentage of the total value of their policy. If an individual sells a policy worth $500,000, for example, he or she might receive $210,000 in cash.

The service is available only to people age 65 and over, those with a life expectancy between four and 12 years, or those diagnosed with a terminal illness. The policy must also have a value of at least $250,000.

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The upshot for those who buy in is clear: a quick influx of cash. So, too, is the benefit for funders, who often collect more than 50 percent of the policy's net worth.

The percentage of the policy's overall worth that an individual receives is determined by his or her age and overall health. Those whom the funders believe have less time to live collect more, because the funders believe they will collect on the policy more quickly.

People taking advantage of life settlements may be retirees who need an extra source of cash because of losses in the stock market, says Sid Friedman, chief executive of Corporate Financial Services, which helps individuals sell their policies to funders. Others may feel freer to sell their polices because their beneficiaries have passed away or are no longer dependent on the funds. "Everybody wins in this case," says Mr. Friedman.

But some experts say life settlements are a bad deal for consumers. Policyholders should not be quick to abandon what is many consumers' top financial investment, they say, notwithstanding that life insurance is the one investment that a policyholder can never fully gain from.

"If the owner needs cash for other purposes, almost any other asset should be liquidated instead of the life policy, as long as leaving the estate is still part of the overall financial plan," says Peter Skar, chief actuary for Mass Mutual Financial Group.

A life-insurance policy will likely have a higher rate of return then any other asset a person owns, Mr. Skar adds.

Preparing for long-term care

People concerned more about the costs of at-home or nursing-home care are showing growing interest in insurance that pays for long-term care.

Experts credit an uptick in the number of these policies to the rising costs of care. Nursing-home care now costs an average of $55,000 a year.

Within the next 30 years, those expenses are expected to quadruple, reaching $68,000 a year for a home-healthcare aide and $241,000 for a year of nursing-home care, according to the American Council of Life Insurers (ACLI).

Even though most nursing-home stays are shorter than a year (one month of care costs about $4,400), the overwhelming cost of long-term care is drawing more attention to the value of additional insurance.

Institutions are responding to the increased need. More than one-third of large companies are offering long-term-care insurance as an employee benefit, according to ACLI, and 22 states are offering the insurance to their employees.

Long-term care was originally available only to Medicare recipients and those with acute physical problems. Now, people who have problems with daily activities, like bathing and eating, as well as those with cognitive and emotional problems can take advantage of long-term care benefits.

Most long-term care policies cover nursing-home and at-home care. For middle-class consumers who hope to maintain their standard of living while receiving long-term care, the insurance is essential to help afford a decent care facility, according to Chris Cooper, president of Elder Advocates Inc., a private geriatric-care management firm in Toledo, Ohio.

Most Americans are buying the insurance when they reach the age of 66. But that is too late for many consumers, says Mr. Cooper, because they may be turned down for even the most minor of medical issues.

"People should start talking about the insurance about five to 10 years before they actually retire," says Cooper.

More people are taking notice of the insurance after learning from an employer that Medicare will usually only pay for up to 20 days of a hospital stay, and will not cover at-home or nursing-home care.

Others are becoming more aware after caring for their own parents. "There are a lot of caregivers out there, and we're starting to see a lot of people take notice," says Lynn Boyd, senior director of ACLI.

Two lives, one policy

Because of rising home and property values over the past decade, more consumers are also making use of life insurance that helps families pay their estate taxes.

Survivorship life insurance is essentially one policy written on two lives. Couples often buy them so that their children receive the benefit on their policy when their parents' estate tax comes due.

The rise in the number of Americans with estates worth about $1 million, at which point the tax now comes into play, has made the insurance far more useful. But because the tax threshold will move to $1.5 million next year, and to $3.5 million by 2009, others may choose to hold back.

Consumers will need to pay close attention, however, because the estate-tax threshold is scheduled fall back to $1 million by 2011.

"You need to follow the tax law to make sure this is a useful insurance," says Cooper.