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Betty's Corner

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Life Settlements Beat the Buzzer on Convertible Term


Written By Stephen E. Terrell

For your customers in their 70s with maturing convertible term policies, the clock is ticking down and a life settlement solution might just be the best, last-second shot option available.

Life insurance settlements offer agents the opportunity to help their clients evaluate the dwindling asset value of convertible term life insurance policies nearing expiration. In the right circumstances, agents earn commissions when policyholders cash out by first converting to whole or universal life, then selling the permanent policies to life settlement providers.

In this scenario, the term policyholder avoids the higher premium costs associated with most convertible policies and receives cash proportionate with the value of the new asset. Agents earn commissions on the converted policy and again on the life settlement.

In 20 years the life settlements segment has grown to more than $6 billion annually. Insurance agents are the key to explaining how and why to cash in a life insurance policy. They hold a wealth of information about policyholders and their personal and family situations. Settlement providers receive applications, process and underwrite them and prepare settlement offers with sources of capital prepared to purchase the policies for cash. Term policies are particularly attractive if you draw up a game plan.

The first step is to review your client portfolio for customers whose convertible term policies are nearing maturity. Particularly people who purchased major dollar-value policies a decade or more ago face greatly increased premiums to renew or convert. In today's economy, coverage may appear less attractive than the cash. The temptation is strong to simply let the policy lapse at maturity without perceiving any asset value at all. Your calm coaching at this moment can make the difference between a win and a loss.

As you are aware, most, though not all, term life insurance policies are convertible. If you are typical, you have advised term buyers to pay the slightly higher premium so their policies can be converted in the future and to make sure they remain insurable. The customers who heeded your advice comprise your potential market and now is the moment your counsel can pay off for them as well as for you.

It's very likely your older customers are not aware or have forgotten about the conversion option. Among your convertible term policies in force, how many are due to expire in the next few years? Especially if a term policyholder is elderly, sick or not otherwise eligible for a new, permanent policy, then converting that term policy might be the only option for them to keep coverage. Thus, a term-to-perm conversion could be a windfall for your policyholders.

Seniors with at least $500,000 in convertible term life insurance coverage are the most obvious candidates. However, in evaluating your own portfolio, don't neglect younger policyholders with shorter life expectancy whose term policies are also expiring. A life settlement appraisal requires you to prepare a simple application and obtain permission to access the policyholders' medical records.

Once again, the basic premise for "term-to-perm" conversion is that the policy be convertible term, within the authorized conversion period determined by the carrier, with a minimum face value of $500,000; and the policyholder over 70 years of age.

If these conditions are met, life settlement presents clear advantages:

  • Underwriting from the existing policy typically transfers to the new, permanent whole life or universal life policy, expediting and reducing the complications of the process.
  • Cost of conversion is built into life settlement. All charges including commissions and the initial permanent policy premium may be considered in the agreement with the life settlement partner, so policyholders face no out of pocket costs.
  • "Found money." Rather than holding an expiring term life insurance policy with high annual costs and little or no asset value, policyholders will have agreed (in advance) to receive a cash settlement proportionate to the value of the newly acquired permanent life policy. Likewise brokers perceive standard commissions on the permanent policy and a predetermined commission on the life settlement conversion.

Let me cite an actual example: A 72-year old male with a $1 million, 20-year, convertible term policy was determining his options. The term was about to end, and the policy would be worthless if he didn't renew or convert. The annual premiums to renew increased dramatically – from $5,900 to $59,000 per year.

The agent proposed term-to-perm and created a cost illustration that listed the expenses associated with policy conversion.

The life settlement provider computed a potential settlement offer, contingent on the conversion. The insured paid the conversion premium, then sold the newly converted policy to the settlement company. The transaction netted the policyholder more than $42,000.

The agent turned a non-performing asset into a net gain for the client and earned a fee on the conversion and on the life settlement. In addition, his client happily referred him to other prospects.

Once agents have made the decision to offer life settlements to their policyholders, they sign a letter of intent with a settlement partner, undergo training such as Certified Life Settlement Consultant certification, if desired, and begin to contact top priority clients and submit applications. The cash life settlement offer to policyholders is based upon many factors and priced on a case-by-case basis. Two key factors are policy face value and the insured's estimated life expectancy. After you submit an application and your life settlement partner evaluates it, an offer is extended to the policyholder/seller. The offer obviously should provide your client a substantial cash settlement. The purchasing company agrees to pay the life insurance premiums for the remainder of the policyholder's life, and, in return, the purchaser is paid the death benefit when the policyholder passes away.

Looking forward, the value of convertible term for younger market segments becomes quite apparent. Agents with aging baby boomer clients, for example, should be selling convertible term policies as low-cost means to prepare for a future life settlement. From the agency standpoint, life settlements become an important integrated revenue source. In addition to the commissions earned, the process opens opportunities for new life insurance policy sales or alternatives such as estate planning with the same clients. The best professional sports coaches know that success today – more than ever – rests in end-game strategy. As a professional financial counselor, you should add life settlement alternatives as buzzer beaters in your strategy for elderly convertible term customers.

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