Life Settlements

Every year, 500,000 older Americans lapse their life insurance policies, according to a survey by the Insurance Studies Institute.  And millions each year will surrender their policies.

Most people (and their advisors) either do not know about life insurance settlements or have preconceived ideas about them. Misinformation about life settlements abounds. Here are eight easy things to know about life settlements:

1. Any type of policy can be sold. In fact, term policies represent the second most sold type of life policy, behind universal life. How? The key is that the policy must be convertible, and the policy cannot be past the conversion deadline. An important suggestion is, if a client wishes to sell a term policy, plan to start 5-6 months ahead of the deadline to allow plenty of time to market the policy and complete the settlement.
2. Healthy people can sell their policies. The industry essentially started in the 1980s as viaticals, with terminally ill clients selling their policies to pay medical bills or improve their quality of life. Some people think that is where we still are today, but the market has changed dramatically. A buyer (typically an investor group) does consider a client’s health and life expectancy when determining how much to offer on a policy.

It is true that the shorter the life expectancy, the higher the value paid for the policy. Therefore, the older a client is, the healthier they can be to qualify. The younger a client is, the more health impairments they can be to qualify. Every client’s situation is unique, but their relative health does not preclude them from selling their policy.

3. Policies do not have to be large to be sold. The focus of media articles and blogs is often on clients who received hundreds of thousands of dollars for their policy. It is true clients can receive that amount, but their policy also usually has a multimillion-dollar face value. Many clients have policies well below $1 million and are mistaken that only larger policies can be sold.  The reality is policies as low as $100,000 in face value can be sold.
4. Most clients do not sell their policies because they need the money. The life insurance industry has done a good job of adding accelerated death benefits and critical illness provisions to their policies. This gives clients additional options, so they don’t have to sell their policies in their time of need. Instead, most people sell their policy because they no longer want or need the coverage.

Many times, clients purchased the policy 10, 15 or 20 years ago, but now the reason they originally purchased the policy is no longer relevant. Some examples are: The client has retired and no longer needs the income replacement;  their home is paid off;  the client sold their business, so a key person policy is no longer needed;  a spouse has died, etc. Policies also become unwanted:  a term policy that is about to expire; some universal life policies are becoming unaffordable or are “imploding” over time; or due to limited income in retirement, policies become too expensive.

5. Clients do not have to sell their entire policy. A client may choose to sell only a portion of their policy. A good example is a client who has a $1.5 million convertible term policy but is retiring.  The mortgage is paid off so she doesn’t need all the coverage and doesn’t want to pay the premiums anymore for all $1.5 million, but she still would like some death benefit. She has chosen to sell $1 million of her policy and retain $500,000 for her family.
6. Life settlements are not just for clients in their 80s or 90s. Age is relevant in determining what an investor will offer for a policy. But a client’s health is also important. Life insurance settlements generally are best for clients age 65 or older, but that is just a guideline. Buyers are typically looking for clients with 10-15 years of life expectancy – sometimes 20(ish). Clients who are younger routinely sell their policies, but younger clients have more significant health issues to fit into that life expectancy window.
7. Life settlements can work for clients in any economic stratus. A life insurance settlement can be a good option any time a policy is not needed or wanted. With policy face values from $100,000 being sold, a life insurance settlement is accessible for many people.
8. The market is legal and highly regulated. A U.S. Supreme Court decision in 1911 paved the legal foundation for life insurance settlements.   Departments of Insurance in  43 states and the territory of Puerto Rico regulate life settlements, affording protection and transparency for approximately 90% of the U.S.   The National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL) have been very involved in crafting model language and disclosure notices to protect consumers, which have been adopted by the majority of states.

The opportunity for insurance brokers and financial professionals is enormous. Life insurance settlements are a key to client retention and an avenue for new client acquisition. The settlement itself can be an additional source, but the bigger picture is the investment advice and guidance your client will need regarding the funds they receive.

And so, a “hidden asset” that a client is going to lapse and collect little or nothing on, turns into a good funding source for the client and a revenue source for you. According to a 2014 London Business School Study, “Americans who sold their unwanted life insurance policies, collectively received more than four times the amount they would have received had they surrendered them to their life insurance companies.”

The Insurance Studies Institute found 90% of seniors surveyed would have considered a life insurance settlement, if they had known about them. Life settlements are not appropriate for everyone, nor should they be. But if all the alternatives have been considered, and the decision has been made to lapse or surrender a life insurance policy, a life insurance settlement can offer your client significantly greater value.

Interested in learning more? Give us a call at 631-730-8262 or Click to schedule a 15 minute call

#lifesettlements, #lifeinsurance