by Stephen Terrell
The life settlement industry began more than 20 years ago, offering a means to lift the financial burden from those suffering from devastating illnesses. Today it is thriving as a financial option not only for those facing a difficult time in retirement, but also for high net worth seniors and savvy financial professionals. Life settlement companies perform free annual evaluations of policies, and insureds can sell a portion of their death benefit to a settlement company while keeping the remainder for their beneficiaries.
Growing long-term care costs and increasing longevity are two main drivers for the life settlement industry. The number of people that will reach the age of 100 will increase 900% between now and the year 2050, according to a report published by AARP in 2011. Sadly, our economy is not structured to accommodate so many people who need long-term care. Life settlements are becoming a mainstream option as unwanted or unneeded life insurance has the potential to help fill the gap.
A consequence of extended living is that life insurance premiums eventually reach a point in which they are too high to maintain. Increased average life expectancies are factored into premium rates so it is inevitable for them to eventually reach a price level that can no longer be maintained. Instead of simply allowing a policy to lapse, it makes far more financial sense for seniors to choose a life settlement and receive a windfall they have helped accumulate over time.
What Consumers Should Know
In your 50s, know about life settlements. Clients in their 50s should be evaluating their life insurance coverage and ensuring that their policy term extends into their 70s, when a life settlement is most likely. A term policy with a conversion rider may be fairly easy to extend, and such policies can be converted to permanent coverage and sold into the life settlement market.
In your 60s, plan for a life settlement. Clients in their 60s should be evaluating their coverage and looking at all possible channels to keep coverage in force for the next decade. Life settlement providers will evaluate clients free of charge, and agents can illustrate the costs and benefits of keeping coverage in force. Is it worthwhile to keep coverage in force for a few more years, if the payoff could be in the six-figure range once the client reaches his or her 70s? Most agents and clients will say yes, and the client deserves to know about it. Annual policy valuation may represent the single easiest way to educate clients about life settlements and build a pipeline of future business.
In your 70s, perform a life settlement. Each day, seniors with unneeded or unwanted policies let them lapse; in so doing, they receive nothing in return for years of paying premiums. Clients in their 70s need to be quickly educated about the benefits of life settlements in the very short term. They can receive cash for something they were going to let lapse anyway.
Several states have passed Medicaid life settlement laws, which enable seniors with a life insurance policy with a face value of $10,000 or more to pay for their long-term care through a life settlement. Before the law was passed, life insurance policies were considered an asset and had to be surrendered prior to enrollment. This meant that someone paying premiums for decades would have to surrender the policy for an extremely small portion of what the policy was actually worth. Many other states have already begun the process of introducing similar legislation.
Downsides
Life settlements are not for everyone. While there is little risk for consumers, there are instances when a settlement is not the right choice for policyholders. It’s not an Investment option for individuals. Investing in life settlements is strongly discouraged for all but the largest and most sophisticated investors. Most negative news about the industry comes from instances when individuals invested in unscrupulous life settlement companies. Most life settlement companies do not accept individual investors, and we don’t advise any individuals to invest their retirement savings in the industry. It is a much better match for pension funds, endowments and hedge funds.
It’s best if a policyholder has the means to keep the policy in force. If an individual policyholder has the means to keep a policy in force until their demise, we advise them to forgo a life settlement and hold the policy. Payment of the death benefit to beneficiaries will always be much higher than a life settlement. If paying premiums becomes onerous though, we recommend life settlements as a way to exit policy ownership.
An individual can only own a finite amount of life insurance coverage. Once a life insurance policy is sold to a life settlement provider, the coverage remains in force and it may affect future insurability. If policyholders want to replace coverage in the short or long term, they must be certain that insurance companies will be willing to write future policies, knowing the original coverage will be in force until their demise. There have been instances where individuals who sold policies were unable to replace it.
Life settlements provide a valuable service for seniors and Boomers. While they may not be right for every person with life insurance, we believe all consumers should know about the option and plan for one if their economic circumstances are a long-term fit.
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Stephen E. Terrell is Senior Vice President of Market Development and Branding of The Lifeline Program, a life settlement provider based in Atlanta, Ga. Terrell oversees all aspects of marketing including advertising, public relations and social media to educate and build a new market for financial professionals with life settlements, broadening revenue and increasing commissions. For more information, call 770-724-7300 or visit www. thelifeline.com or follow him on Twitter @LifelineProgram