Using a Life Settlement as an Inflation Hedge

Clock January 10, 2023


30-second summary

Inflation is hitting seniors especially hard, and many find that a life settlement can help them fight rising costs.

Selling their policy helps by:

  • Reducing their monthly expenses by eliminating future premium payments
  • Providing a lump-sum cash buyout they can use to invest in a fixed instrument (such as bonds, T-bills, etc.) to create additional monthly cash flow

In this article, we’ll look at how the money seniors receive from a life settlement can combat inflation and be used for other purposes in retirement.

If inflation is taking its toll on your clients, contact us today and one of our life settlement specialists will be happy to provide you with the resources you need to present life settlements as an option to your clients.

Worker explaining policy options

Today’s seniors are facing severe financial challenges. The retirement portfolios they have grown over the years have been diminishing, with inflation rising to levels unseen in nearly four decades.

To help their senior clients weather this financial storm and come out stronger on the other side, advisors have made sound recommendations, including:

  • Diversifying portfolios with alternative investments
  • Making tax-efficient investments
  • Considering consumer-staple stocks with strong pricing power

Another option that an increasing number of financial advisors are recommending to their clients is exploring a life settlement.

Understanding the life settlement transaction

A life settlement is the sale of a life insurance policy to a third-party for its market value. In the transaction, the policyowner relinquishes ownership of the policy and its death benefit and, in return, receives a cash payment above the policy’s cash surrender value (CSV).

Life settlements are a viable option for people age 70 and older who own a life insurance policy with a face amount of $100,000 or more. While life settlements typically involve the sale of a permanent life insurance policy, such as whole life or universal life, convertible term life insurance policies can also be considered.

Inflation is taking its toll on older adults

In 2022, the average inflation rate will likely eclipse 8.1%. This is in comparison to an average annual rate of 4.7% in 2021.

These numbers are alarming in comparison to 2016-2020, where the average inflation rate was only about 2.0%. Prices for food, fuel, and nearly everything else are on the rise, and consumers are feeling it.

Seniors have been impacted the most. As of 2019, most of the 54 million Americans 65 and older are living on a fixed income and have limited savings and retirement accounts. Inflation is steadily decreasing their purchasing power and raising their stress levels.

Even without inflation, seniors face increasing financial pressure from mounting medical expenses, which become more significant as they age. . Inflation is pushing these numbers upwards to never-before-seen levels.

How can a life settlement help?

When counseling clients of any age, financial advisors often discuss two ways to improve a client’s financial situation: increase income and decrease expenses. A life settlement accomplishes both.

First, they no longer have to pay their life insurance premium. With a life settlement, the buyer of the policy assumes responsibility for all future premium payments, absolving the senior from any future outlays for their policy.

Second, they receive a cash infusion. Selling their life insurance policy results in a lump-sum payment, which can be used to pay for everyday staples, living expenses, or invested in a fixed instrument to create an additional income stream.

Other reasons to consider a life settlement

Because life insurance is personal property, the policyowner can sell their policy for any reason, including replenishing a nest egg that has been strained by rising inflation.

Other reasons people sell their life insurance policy include the following:

  • They no longer need the policy
  • The premiums are no longer affordable
  • They want to retire debt, such as paying off a mortgage
  • They need the money for long-term care expenses
  • They wish to use the proceeds to enjoy retirement to its fullest

A life settlement should also be considered when the policy is at risk of lapse or surrender. While these options provide little or no value in return for the years of premiums paid, a life settlement pays the policyowner the market value for the policy, which averages four or more times the cash surrender value.

Explore a life settlement today with Lighthouse Life

If you’d like to learn more about how selling a life insurance policy can help create additional income and fight inflation, use our Life Settlement Estimate Calculator to see an estimate of how much your client can receive for their policy.