October 30, 2020
This article originally appeared in Retirement Daily on TheStreet.com.
For more than two decades, life settlements have occupied a distinctive niche within the insurance and financial services markets. A life settlement is the sale of a life insurance policy to a third party for its market value. In the transaction, the seller receives a substantial payout, and the buyer becomes the owner and beneficiary of the policy.
Life settlements offer an appealing and valuable alternative to policyowners who are very likely to be faced with surrendering their policy to the issuing company, often for little in return, or letting it lapse entirely and receiving no value in return. In fact, according to 2019 life insurance industry data, 92 percent of life insurance policies (by face amount) that terminated in 2018 were lapsed or surrendered, and, therefore, did not pay a death benefit. In a life settlement, these same policyowners receive “a lump sum payment that is generally four or more times greater than if they lapsed or surrendered their policy,” according to a report by the National Association of Insurance Commissioners.
For much of the past 20 years, life settlements have primarily been an option for seniors who have had a decline in health since their policy was first issued. But recently, eligibility criteria for life settlements have expanded to include healthy seniors. This means that now seniors without impaired health can benefit from a life settlement when faced with lapsing or surrendering their policies.
To be eligible for a healthy senior life settlement, generally the insured must be 75 years old or older and have a guaranteed universal life (GUL), and in some cases even a traditional universal life (UL), policy with a death benefit of $250,000 or more.
“Healthy” means the insured was in good health when the policy was issued (rated as a “preferred” or “standard” risk initially) and hasn’t experienced a material change in health since then. This definition is somewhat broad because while certain health conditions might be considered serious from the perspective of the insured, they would not change the risk rating for the life insurance policy or a life settlement.
Why would a healthy senior be interested in selling their life insurance policy? There are many good reasons, all of which relate to varying financial and personal circumstances.
First and foremost, life settlements pay policyowners significantly more than if a policy is lapsed or surrendered back to the insurance company. Life settlements can often pay an amount that equals the policyowner’s cumulative premium payments. So, if a senior no longer wishes to maintain the policy, a life settlement will most often be a better financial choice than simply giving that policy back to the insurance company.
Another common reason is that many seniors need more money in retirement than they initially expected. than they did in previous generations, and it is now common for retirements to extend to 20-30 years. As a result, and perhaps unsurprisingly, . Whether seniors are looking to reduce expenses, increase income, or both, life settlements provide an accessible path to increased financial security.
Beyond the general need to fund longer retirements, seniors increasingly need more money for both current and anticipated future healthcare expenses. Fidelity estimates the average couple will need around $300,000 to pay for out-of-pocket healthcare and long-term care expenses in retirement. Selling a life insurance policy provides a sizable lump-sum cash payment and ends expensive premium payments. This simultaneously reduces expenses while generating additional income, all of which can be used to plan and pay for out-of-pocket healthcare and long-term care needs.
Finally, many seniors sell their policies because they no longer need them. Often, other retirement income is sufficient to fund their retirement. Sometimes, there is no longer a beneficiary on the policy (through death or divorce, for instance). And because the estate tax threshold has , far fewer Americans are now subject to it, eliminating the reason for keeping the policy. In all of these instances, a life settlement makes sense as an alternative to receiving little or nothing back from the insurance company – for all seniors, including healthy seniors.
Robert, a 75-year-old in good health was preparing to sell his business. As such, the $1 million GUL policy he took out a few years ago to protect the business was no longer needed. It had accrued no cash value over the years.
Until now, Robert’s options would have been to lapse or surrender the policy for zero cash value. A healthy senior life settlement is Robert’s third, and likely best, option. It cost Robert nothing to have the policy’s value appraised and he received an offer to purchase the policy within 24 hours. Robert’s life settlement of his GUL paid him $150,000. That’s “found money” for Robert and his family, above and beyond the value he received from the sale of his company.
Life settlements remain relatively unknown among seniors, as well as their insurance and financial advisors. As a result, millions of seniors are missing out on income that could help them in retirement. revealed that in 2019 just over 2,800 seniors sold their policies. This is less than 2 percent of the policies that could have been sold via a life settlement, according to a 2019 report by Conning, an insurance research firm.
Until now, those who are familiar with life settlements believed there is no market for healthy seniors to sell their policies and receive a valuable return. This is primarily because the market has historically required an insured to have impaired health as a prerequisite to a life settlement.
Now that a few life settlement companies are offering life settlements to healthy seniors, it’s more important than ever to raise awareness among all seniors and their insurance and financial advisors that life settlements are an alternative to lapsing or surrendering their life policies.
A GUL or UL policy of at least $250,000 where the insured is at least 75 years old, and that is likely to be lapsed or surrendered should be evaluated for a life settlement. It’s the difference between receiving a significant cash payout and receiving nothing (or next to nothing) for policies that are going to be terminated.
Letting a qualifying policy lapse is akin to paying a 30-year mortgage for 29 years and then walking away with nothing to show for it. Life settlements can provide a dramatically better alternative.
You might not have known before that this option existed, but now that you do you owe it to yourself to see how much you could get in a life settlement — especially if you are healthy.