TV TALKSHOW host Larry King has no idea who owns a $10 million insurance policy on his life.

Mr. King bought the life insurance policy in 2004, according to a civil lawsuit filed in October 2007 in U.S. District Court in Los Angeles. Within a few weeks he resold it to a third party for $550,000, collecting a fast profit.

Now he's suing the company that brokered the insurance deal because he says he didn't fully understand the transaction and believes that he could have gotten millions more for the policy.

Mr. King's high-profile case has brought more attention to an obscure corner of the insurance industry where people receive big payoffs for their insurance policies without having to die.

"This is still a cottage industry. Many life insurance agents don't even know of it," said Scott Willkomm, chief operating officer of mortality linked products for J.G. Wentworth in Bryn Mawr, Montgomery County.

Life insurance has always been a way to help compensate loved ones for their emotional and financial loss when a policyholder's life ends, but more investors are buying policies in order to cash in on the death of people they don't even know.

Policy owners who need cash -- and no longer need their life insurance policies -- are selling them to third party buyers for more than the cash surrender value offered by insurance companies.

The purchaser becomes the new beneficiary of the policy, makes all future premium payments and can resell the policy to others without the original owner's knowledge or consent.

"Our concerns are that these types of [transactions] may cause insurance companies to reprice premiums for older individuals higher, making insurance more inaccessible," said Marvin Feldman, chief executive officer of Life Foundation in Arlington, Va., a nonprofit insurance education organization.

While traditional investments such as stocks and real estate have lagged in recent years, life insurance has emerged as a thriving new asset class where policies are being bought and sold on the secondary market along with mortgages, bonds and commercial debt.

David Kleinhandler LLC, a wealth management firm in New York, advises its wealthy clients over age 65 to sell their life polices into the secondary market instead of returning them to the insurance carrier for a small cash value.

"The insurance carrier for over 150 years has had a [monopoly] on the marketplace because the only place a person could sell their policy was to the carrier," said David Kleinhandler, the firm's owner.

He said the companies that end up buying and reselling his clients' policies are major institutions with marquee names such as Bear Stearns, AIG, Credit Suisse, Goldman Sachs and hedge funds and institutional investors looking for new sources of returns.

The Federal Trade Commission estimated $45 billion in insurance polices were sold into the secondary market in 2007. Industry estimates suggest that number could double this year as more seniors become aware of the option.

The insurance industry is wrestling with how to respond to these transactions. Some companies have changed their policy application forms to ask whether the insurance is being purchased for resale to investors.

These deals have the potential to damage the bottom line for insurance companies because insurance companies often count on a large percentage of customers allowing their policies to lapse. Since investors will be less likely to let policies lapse, payouts may increase, resulting in a rise in premiums.

Life insurance policies bought and sold for profit on the secondary market fall into three categories: life settlements, viatical settlements and stranger-owned policies.

Life settlements occur when a person has owned a policy for years and no longer needs or wants the policy. Viatical settlements occur when the policyholder develops a terminal illness, such as cancer or AIDS, and sells the policy to meet their medical needs. Stranger-owned policies, however, are those bought exclusively for resale.

"The question the industry has in terms of stranger-owned life insurance is the lack of insurable interest," Mr. Feldman said. "These are being generated for the purpose of being sold on the secondary market, and that was never the intent of insurance."

Larry Brody, an attorney for the Bryan Cave LLP law firm in St. Louis, represents clients who have purchased policies solely to resell to strangers.

In those transactions, a lender agrees to pay two years of life insurance premiums for the client, which is the minimum required waiting period. At the end of two years, the insured has three choices: keep the policy by repaying the loan plus interest, sell the policy and use the proceeds to repay the loan or give the policy to the lender to satisfy the loan.

"I've been doing this for 20 years, and I've never had a client yet who bought the policy," Mr. Brody said. "We've either sold it or walked away from the loan."

Mr. Brody said he did not disagree with those who criticize stranger-owned life insurance. But if his clients understand the risks and can benefit from two years worth of free insurance he would advise them to do it.

Stranger-owned life settlements are used mainly by older people who are healthy and wealthy enough to obtain life insurance policies of at least $1 million. His average client has tens of millions of dollars in insurance on their lives.

"One of the risks in stranger-owned insurance is death," Mr. Brody said. "You have to be sure you're dealing with an institutional lender who will sell the policy to an institutional buyer. In the sales documents, I require this.

"I tell my clients I don't want the word 'Soprano' in the buyer's name."

Most of the policies end up in pools owned by large financial institutions and hedge funds. But there's no guarantee who will end up owning the policy, and that might disturb some people.

Adam Sherman, president of Firstrust Financial Resources, a life insurance advisory firm in Philadelphia, works with high net worth clients and estate plans. He advises them to invest in life insurance policies on the secondary market in addition to traditional stocks, bonds, real estate and mutual funds.

"The reason for that is it's a noncorrelated asset to the stock market, so it's become an even more popular asset class given how the stock market has performed recently."

Tim Grant can be reached at tgrant@post-gazette.com or 412-263-1591.