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By Mike Heuer

Most term life insurance policies offer the option to convert to whole life insurance coverage at some point, and an increasingly popular form for seniors to boost their retirement income recently gained a boost by a New York appellate court.

Recently, the New York Court of Appeals by a 5-2 vote ruled it is legal for residents to sell their life insurance benefits to a third party in the Empire State. Called “viatical settlements” or “stranger-originated life insurance (STOLI),” the controversial practice has been outlawed or otherwise curtailed in up to 30 states. Senior citizens in the United States in 2008 sold off life insurance policies totaling nearly $12 billion – nearly double the amount sold two years ago, according to a U.S. Senate special committee on aging. Most did so to replenish depleted retirement funds or help pay for medical bills.

The New York Legislature had enacted laws making it illegal to transfer life insurance policies to third parties within two years of purchasing a life insurance policy and outlawed the practice of allowing third parties to arrange the transfer of life insurance policies to others. But people buying term life insurance plans who later convert them to whole life insurance and then sell those death benefits to a third party were not affected by the law.<\p>

The appellate court issued its judgment after hearing a case in which a wealthy man purchased several life insurance policies providing a combined $56 million in life insurance benefits and died in 2008. Several investors filed claims against the policies along with the man’s spouse, but the life insurance companies refused to pay the investors, saying the practice had been outlawed in New York. One investor, Lifemark, in 2007 paid nearly $2 million to purchase a $10 million life insurance policy on the man, who died a year later.

A majority of judges agreed New York law allows adults with life insurance to choose to choose any beneficiary, whether it is a person, organization or other entity. The two dissenting judges said such transactions were condemned by courts for decades and amount to an investment in someone’s death.