Advocates of life settlements say that they offer fiscal relief in hard times, especially to seniors whose retirement portfolios have tanked. “We need to be singing at the tops of our voices that selling your life insurance is an option,” says Scott Page, president of the Lifeline Program, a large settlement company. For potential investors, meanwhile, the pitch is that settlements offer a safe harbor. Let the Dow rise, let the Dow fall; a death payout is an uncorrelated asset whose timing bears almost no connection to the mood swings of the market. In addition, both sides participating in settlement transactions are winners: the policy seller is paid upfront, and the buyer is paid even more later. Both parties are playing with house money — that of the insurance company — and the only question is how it will be divvied up.

For all the supposed benefits, settlements still strike many people as creepy. They invert the traditional incentives of life insurance. Insurance companies have always had an interest in you, the policyholder, living as long as possible so that they can collect more premiums. Generally, you also want to live a long time, for obvious reasons. But a settlement means someone hits the jackpot when you die, and the sooner that happens, the more money that person makes.

Clark Hogan represents people who want to sell their life-insurance policies. To find new clients, he cold-calls financial planners, accountants, attorneys and insurance agents. “Hey, good afternoon, Clark Hogan here,” he said one afternoon at the end of last year. “I’m wondering if you’ve ever had a client surrender a life-insurance policy and if you’ve considered a life settlement instead. . . .”

Seller’s agents like Hogan say that while it may seem wrong for strangers to profit from your demise, settlements are a resoundingly pro-consumer innovation. In the casino of life insurance, the game is rigged. The industry’s profit models rely upon the fact that more than two-thirds of customers lapse — stop paying premiums — before dying, thus invalidating their policies before their beneficiaries can collect a cent. People often have good reasons for doing this. A husband outlives his wife, the intended beneficiary. An elderly woman with a dwindling pension decides that she needs money for medical care now more than her heirs will need it later.

Policyholders have only one possible escape route beyond lapsing. If the policy has a redemption provision, the customer can sell it back to the insurance company for a tiny fraction of its full face value. But this option represents the prison of a monopsony, a marketplace with only one possible buyer. “You wouldn’t want to buy a Ford and turn around 10 years later and find out that the only entity you could sell it to is back to Ford,” says Vince Granieri, the chief actuary at the life-expectancy company 21st Services. Settlements let the consumer shop a policy to multiple buyers and potentially get anywhere from 2 percent to more than 60 percent of its face value. For most people, discovering that they can sell an asset whose value rivals that of their house is a joyful surprise. “It’s almost like finding money under the mattress,” says John Yaker, former president of Quantum Life Settlements.

Hogan’s cold calls that day yielded two financial planners who offered to send settlement cases his way, but receptive audiences aren’t the norm. One planner he called dismissed life-settlement brokers with an expletive. Hogan curled over toward the speakerphone as if in abdominal distress but replied in upbeat tones. “This is the fight I have to win on behalf of the financially distressed life-insurance policyholder,” he said, “to persuade them that there are legitimate buyers out there serving an industry that’s trending toward legitimacy.”

Life settlements have a dubious past indeed; as relatively new, poorly understood and, until recently, minimally regulated transactions, they have been prime terrain for fraud. The most notorious scheme even has its own acronym, Stoli, for stranger-originated life insurance, which typically targets the elderly. I spoke with one couple — wealthy, elderly retirees in Florida who asked not to be named — who were routinely approached to take out life-insurance policies. “Every other day you’d get invited for a free dinner at a high-class restaurant as an incentive to listen to a spiel on life settlements,” the husband said. That the couple didn’t actually have insurance did not dissuade the pitchmen. “They would try to convince you to take out a policy, hold it for a while and then flip it,” he said. The shady brokers offered to cover the premiums; after two years the brokers would get themselves named as the beneficiaries on a policy and then wait for the couple to die so that they could collect the insurance-company payout.