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Betty's Corner

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Life Settlements: A Silver Lining in Retirement Crisis

By Stephen Terrell

By 2020, 20 percent of Americans - 70 to 80 million people - will be at least 65 years old, the traditional age people plan to retire. If both husband and wife live until age 65, there is a 50/50 chance one of them will reach age 92. These additional years can place tremendous pressure on retirement finances. Workers age 55 and older have been especially hard hit during the Great Recession, enduring record-high levels of unemployment and remaining jobless longer than younger workers. Just 14 percent of workers are very confident they will have enough money to live comfortably in retirement according to Employee Benefit Research Institute's 2012 Retirement Confidence Survey.

For boomers and seniors old enough to see grandchildren reach maturity, the need for life insurance might feel especially obsolete. But an alternative finance option available to seniors with an unwanted life insurance policy can provide a policyholder a substantial return on their investment and serve as a serious incentive to keep it as long as possible. Life settlements are transactions in which an insurance policy is sold for more than its cash surrender value but less than its face amount.

Outlined below is an explanation of the current state of the life settlement market, how the industry benefits financial advisors and agents, how the proceeds from settlements can be used and tips on how to introduce them to varying groups of policyholders.

Understanding the Market Opportunity
Citizens in their 60s, 70s and 80s were hit hard by the Great Recession. Home prices fell by a third - or more. Stock portfolios halved. Incomes were shaved. All these factors hit seniors on the brink of retirement, and for some, eliminated the chance of retiring anytime soon.

recent study by Wells Fargo found that a growing number of seniors plan to postpone retirement until they reach their 80s - pushing back the so-called Golden Years a full decade.

Boomers have saved little for retirement, many pre-retirees now face mounting bills from supporting not only their children but also their own parents (the "Sandwich Generation) and a growing divorce rate among seniors ("silver divorces) has sent traditional family economics into a tailspin.

Life settlements provide a new opportunity. For some, a normal retirement may be out of reach, but for others, life insurance and life settlements may provide an answer.

A 2012 study (performed for The Lifeline Program by ICR), found that baby boomers and seniors appear to be taking a second look at their life insurance policies as an alternative financial solution to paying for retirement. A few of the findings:

  • 55 percent of Baby Boomers are concerned they will have to work past the age of 65.
  • 29 percent would consider selling a life insurance policy for a portion of the face value to fund their retirement.
  • 79 percent felt financial planners and insurance professionals should be informing policyholders about life settlements as a financial option.

At the same time, life insurance agents feel more pressure than ever, facing shrinking earning capacity as the retail sales environment continues to change.

More consumers are removing agents from the equation when purchasing insurance coverage. Recent studies show more Americans now prefer to purchase life insurance online, through the mail or by phone. Three quarters of Americans between the ages of 25 and 44 select the Internet as their first choice for buying life insurance, according to a recent study performed by LIFE Foundation and the Life Insurance Market Research Association. Though 64 percent of consumers continue to purchase life insurance from an agent, the number is fast declining. The evidence, both statistical and anecdotal, suggests that a tremendous business opportunity exists with life settlements.

Benefits to Insurance Agents and Financial Advisors
For financial advisors, life settlements offer many advantages beyond being a new commission source. Advisors can increase assets under management (AUM) from the proceeds of a settlement, prevent the decrease of AUM from future premium payments and transition clients to more relevant/new product - important to ensure that insured has the capacity for more insurance.

Proceeds Can Pay Bills or Buy New Financial Products
There's no limit on how clients can use cash from a settlement. One recent Lifeline client used settlement funds to buy cattle for her grandson's farm. Another client used his settlement to help pay for his ill mother-in-law's at-home healthcare.

If a policyholder's personal financial situation has taken a turn for the worse, affording premium payments can become a challenge. In this situation, a life settlement provides an immediate cash influx to help pay for essential expenses and improve a policyholder's lifestyle. Policyholders can use settlement funds to pay down loans or other outstanding debts. Seniors struggling with debt can sell a policy and have cash to pay off credit cards, mortgages or other loans.

For decades, life settlements have helped policyholders pay healthcare expenses. Seniors afraid of burdening loved ones with health costs can use a settlement to finance pricey prescriptions, hospital bills and treatments. Settlement market values increase on patients fighting serious illnesses.

With a settlement, a policyholder has the option to sit back and witness the joy his or her distributions bring others while he or she is still alive. A policyholder can assess children's and/or grandchildren's needs and wants, and then allocate the funds as he or she sees fit.

A life settlement can also make funds available for other investments, such as a lower cost survivor policy, single premium annuity for supplemental income, long term care insurance or other asset protection tools. A policyholder might also want to invest in more risky yet lucrative investments such as real-estate, stocks, bonds or a new business.

Policyholders of unneeded life insurance can take advantage of a life settlement to take a long-awaited vacation or to buy a luxury item never previously affordable. A life settlement provides the cash to do either or both, thereby allowing seniors to live their lives to the fullest. Seniors desiring to leave behind a legacy of goodwill can use the funds from a life settlement to donate to his or her favorite charity or cause while he or she is still living.

A Strategy Exists for Any Age Group
While a life settlement is typically a strategy for individuals in their 70s or 80s, it makes sense for younger clients to start planning now for a life settlement in the future. The "50/60/70" strategy can guide clients in different age groups.

  • 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 sellable 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.

Not For Everyone
Life settlements serve as an option for those that do not want or do not need life insurance; but a life settlement is not for everyone. Before a client takes steps toward engaging in a life settlement transaction, it's critical that an agent or financial advisor discusses potential consequences. Life settlements are labor-intensive, multi-month processes during which policyholders must be evaluated and submit medical records. Most life settlement transactions take from four to five months to complete. Even after the transaction is complete, sellers must provide regular health updates. A trained representative will regularly call to discuss a policy seller's health status.

In addition, policyholders should seek the services of a professional tax advisor before accepting a settlement offer. The IRS can consider some or all funds from a life settlement as taxable. The amount recouped up to the cumulative premiums paid is usually tax free. Additional money up to the cash surrender value option can be treated as ordinary income. Any excess cash above the cash surrender value can be considered capital gains. Depending on a policy's premiums, full face value, cash surrender value and state tax laws, the taxes on a settlement may outweigh its benefit. Knowing how much of a settlement is subject to taxes can significantly alter the numbers for an otherwise eligible and even ideal candidate.

Another crucial consideration when exploring the option of a life settlement is the ability of the policy seller to obtain another life insurance policy in the future. Depending on a policyholder's age and health conditions, securing life insurance after a settlement may not be a realistic option. This is probably the most compelling reason that life settlements should only be considered for those that no longer need life insurance coverage.

For insurance agents and financial advisors, life settlements offer a new opportunity to assist clients while growing a new market. Research shows Americans still aren't saving enough for retirement. A staggering 60 percent of workers report the total value of their household's saving and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000 (RCS 2012). By converting an unneeded asset into cash, advisors can help their clients fund long-term care, pay bills and ensure retirement, even if it can't happen until after age 65, is still a real possibility.

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