Life Settlements: Hidden Money in an Old Suit Pocket

A former Harvard professor, feeling the squeeze of medical bills for his aging mother-in-law, recently sold his life insurance policy—and was happy to do it. “Found money” was the refrain. Shrinking retirement savings, longer life expectancies and slow economy are driving more seniors to life insurance settlements, and they are finding a more sophisticated marketplace receptive to their financial needs.

A life settlement enables a senior to sell an unneeded or unwanted life insurance policy for immediate cash. The purchasing party pays the remainder of the policy’s premiums, and in return, collects the death benefit when the policyholder passes. Thus, a settlement will always be less than a policy’s face amount, but will also always be more than the cash surrender value. In fact, a settlement typically amounts to five to eight times more than the cash surrender value.

It’s like finding thousands of dollars in an old suit pocket. Life settlements can be an unexpected surprise in the new retirement plans of today and tomorrow. Unlike yesterday’s preferred retirement portfolios of stocks, bonds, CDs, gold, 401k and real estate, it may just be dull old life insurance that provides baby boomers with the cash value and yields to live out their retirement. That’s where you come in.

Life insurance: The treasure in a desk drawer.

Surprisingly, many seniors with whole, universal or convertible term life insurance policies are unaware of this untapped asset in their possession. You could help them plan to sell the policies to a life settlement provider at the right moment for a substantial percentage of the policy’s face value. Unlike investments that have shrunk or disappeared, their policy retains its value. Rather than keep the policy to maturity or let it lapse, you could help senior policyholders convert it to cash.

Among the findings of a 2012 survey of 365 adults from ages 55 to 65 by International Communications Research (ICR) for The Lifeline Program:

• 55% of baby boomers are concerned they will have to work past the age of 65
• 29% would consider selling a life insurance policy for a portion of the face value to fund their retirement
• 79% felt financial planners and insurance professionals should be informing policyholders about life settlements as a financial option
• 76% say people over 65 years old should have life insurance

What’s your client’s financial strategy?

The implications of this research on your role as a life insurance or retirement planning professional are profound. Here’s some guidance we are calling “50/60/70.”

• 50s. Aside from the amount of life insurance coverage, people in their 50s should be carefully anticipating when their policies will mature. If coverage will expire before age 70, they should consider buying the cheapest possible convertible term policy that will get them to age 70. Don’t worry that it is not a permanent policy, as it can be converted later and sold as a life settlement.
• 60s. Policyholders in their 60s should review if the initial reasons to purchase the policies still exist. Spouse death or divorce often changes the need for protection or grown children lessen the need for insurance coverage. The challenge is to keep insurance in force into their 70s while preserving the policy’s value as a saleable cash asset. People this age in failing health may opt to appraise their insurance coverage immediately with a life settlement provider.
• 70s. Elderly policyholders in their 70s or 80s often contemplate letting life insurance policies lapse or not renewing because of huge premium increases. This is precisely when they should be actively evaluating life settlement providers and weighing the relative benefits and optimal timing of selling while their in-force policies are a liquid asset.

Each client retirement strategy is an opportunity for you to offer a unique late-life solution that includes commissionable life settlement conversion of a mature policy plus the opportunity to write new, short-term coverage.

Life settlements come of age with baby boomers.

These strategies have all been made possible over the last two decades with the rise of life settlements. Investment groups are increasingly willing to purchase whole, universal and converted term life insurance policies from their owners for an actuarially determined cash value, a percentage of the policy’s face value.

The 2012 ICR survey demonstrated that life settlements are coming of age in the United States. Over the next 20 years, millions of baby boomers, the largest single population surge in the country’s history, reach retirement age. A majority will need cash to help fund their retirement, yet they remain relatively unfamiliar with the life settlements process and feel you, as their financial counselors and insurance representatives, should be providing more information.

As an educated agent—regardless of the life insurers you represent—you are able to discuss each policyholder’s personal background and future financial needs in confidence. Prospective applicants are typically elderly, carrying life policies of more than $250,000. To initiate the process you submit a confidential request on their behalf and receive a formal offer from a provider stating the amount proffered and detailing all applicable conditions. The life settlement process is completed if, after analyzing the offer, the policyholder elects to sell the policy.

Traditional retirement planning and financial portfolios have been turned on its head. A mediocre economy and frail job market have hindered recovery from a stock market crash and recession which slashed home values and retirement accounts in half and left many pre-retirees in dire need of alternative finance options. In addition, tomorrow’s retirees face longer life expectancies, more expensive health care costs for a longer period of time, and the need for a source of income to hedge against outliving their retirement. With today’s unpredictable stock market, austere interest return rates on traditional savings vehicles and sluggish housing market, life insurance once again merits full evaluation within a person’s financial portfolio.