Rather than let unneeded term policies expire, clients may be able to sell them to a life insurance settlement provider. Life settlements were historically limited to whole-life policies, but new developments offer advisors greater flexibility to access cash for a variety of insurance products. Life insurance settlements have been around for more than 20 years, and while the transactions are not for every situation or every life insurance policy, their overall utility for financial planning has increased significantly. Life settlements can breathe new life and value into term policies, free up capital trapped in irrevocable life insurance trusts and even offer a way for clients to sell half a policy while keeping half of the death benefit.
Life settlements deserve a fresh look.
As background, life settlements enable an individual with a life insurance policy, typically a senior, to sell it on the open market for immediate cash. The seller receives payment that is less than the death benefit but higher than the surrender value, and the insured is no longer required to make premium payments on the policy. The purchaser will receive the death benefit payout when the insured passes away but must also continue paying the policy premiums. Traditionally, a life settlement makes the most sense when an insured no longer needs the insurance coverage and/or can no longer afford it. If the insured’s reason for owning the life insurance changes -- following a divorce or after a spouse’s death for instance -- a life settlement enables the insured to receive a payout on coverage that might have otherwise been surrendered. If premium costs rise and the insured can no longer afford to keep the coverage, then a life settlement can pay a lump sum for a policy that might otherwise lapse.
In recent years, additional scenarios have emerged that often make sense for policyholders.
Term insurance can be converted to permanent insurance and sold as a life settlement
For nearly 20 years, life settlements were only an option for whole life policies. Funding companies wanted to purchase permanent policies and avoid the risk of term policies. Yet term insurance remains one of the most widely used financial protection tools. Most people who buy term insurance hope they will never need it; and when the term expires, they are thankful that they remain alive and well. However, term insurance with a conversion rider can offer a windfall. Life settlement providers will evaluate policies nearing the end of their term, and may provide illustrations that include the cost for conversion for seniors. Seniors can convert the policies to whole life and perform a life settlement in a multi-part transaction that will provide them with a payout and no out-of-pocket expenses.
ILITs require third-party evaluation that may lead to a life settlement
Irrevocable life insurance trusts (ILITs) offer an excellent way to help individuals preserve their wealth and manage future estate taxes. However, the life insurance policies held within such trusts may not be performing at satisfactory levels, and investable capital may be trapped paying for existing policies within the trust. Meanwhile, changes in estate tax laws may make the policies less important to the overall financial plan of the beneficiary.
When trustees perform the required evaluations of insurance policies within an ILIT, a life settlement followed by the purchase of better-designed replacement coverage may be in the best interest of the beneficiaries. It can also free-up capital for investment.
The newest thing: Sell half and keep half
The most exciting development in the life settlement industry in recent years is a new product known as retained death benefits. It enables a senior to sell a life insurance policy for immediate cash but also keep a portion of the death benefit for loved ones. A life settlement provider will take over premium payments, but the policyholder retains a percentage of the face value payout for his or her beneficiaries. It offers quick liquidity but also provides a senior or retiree some peace of mind because they keep a portion of the policy payout. When this is offered, the insured no longer makes premium payments – even though they keep part of the death benefit.
Policy evaluations gaining steam
One aspect of the life settlement process that slowed the industry’s overall growth was the length of time it required. Securing a price quote on a policy sometimes took weeks, leading to frustration among financial planners and advisors. Some licensed life settlement funding companies now complete policy evaluations in a few days, offering a non-binding price quote that enables planners to quickly and easily consider options. Annual policy evaluations, again at no cost, can also help trustees of ILITs make educated decisions about the value of policies and benchmark for the future.
Ensuring a good deal for your client
The life settlement offer remains one of the more complex facets of the transaction. Underwriters weigh myriad factors including the policy face value, premium costs, the seller’s health and his/her life expectancy. Unfortunately, offers may vary widely from one client to the next based on the aforementioned factors. The only certainty is that the offer will exceed the surrender value and be much better for the client than simply letting the coverage lapse. In my experience, an offer of 20% of the face value is average, but ultimately the client and the advisor need to weigh the benefits of selling to determine if a settlement offer is viable.
While life settlements have always be seen as a niche financial planning tool, new developments in the industry make it worth a financial advisor’s time to take a fresh look.
More and more advisors are recognizing that life settlements present a viable option to clients, one that serves them better, diminishes risk and satisfies your obligations. Good business that benefits everyone. Pre-qualify your clients for a life settlement in 48 hours with LifePASS™.