NEW YORK ( MainStreet) — After John Smith purchased a $2 million universal life policy in 2003, the recession took a toll on his estate, and the 73-year-old turned to his policy for financial help. The retiree was paying nearly $40,000 in yearly premiums that he could no longer afford. Smith met with his financial advisor and was informed that the surrender value, including fees and other charges, would be $72,000 less than what he'd paid into it over the years, which was $250,000.

That's when Smith turned to life insurance settlement.

"We ended up paying him $515,000 cash or nearly three times the surrender value his insurance company offered," said Scott Page, president and CEO of the Lifeline Program. "We assumed all his premiums from that point and he was freed of the burden of his monthly payment with more than half a million dollars in fresh cash he could spend as he wished."

Life insurance policies can be acquired by companies, such as Lifeline, which make up a secondary life insurance market. However, imagine how morbid life would feel if a third party had a vested interest in your death benefit.

"Initially the emotional reaction is confusion, but if the client can step back from that, I can then run numbers to clarify," said CJ Bowker, an independent life insurance broker with Aclaro Risk Management in Massachusetts. "The scary part is that life settlement companies are looking for someone near death but I don't know of any life settlement companies that conduct on going monitoring of their life settlement clients in the interest of death."

Lawmakers in Texas passed a bill enabling a policy holder with a face value more than $10,000 to sell it through life settlement for the purpose of using the proceeds to pay for long-term care services.

"Medicaid counselors in Texas are now required to ask an applicant to disclose their assets, including life insurance policies, to determine eligibility," Page told MainStreet. "A life insurance settlement delays the retirees entrance into Medicaid after 65 years old, which can help alleviate the burden on the public safety net."

New York lawmakers may soon follow in the footsteps of Texas with a similar bill that's currently under consideration.

"Insurers are using life insurance settlement as a reason to pull contracts, because it affects lapse ratios and eventually will drive the cost of a life insurance policy up for the average person," Bowker told MainStreet. "When an insurer doesn't have to pay the death benefit, its finances are better off in the long run because it allows the insurer to keep the monthly premiums."

According to a U.S. Government Accountability Office (GAO) report, 38% of all applicants applying for Medicaid have a life insurance policy and the average size of that policy is $92,000. The average life settlement on a $92,000 life insurance policy is $32,000.