Life insurance policies are financial assets for many people. They represent important investments in a diversified portfolio. However, people with grown children who are financially secure may not need the life insurance during retirement that they wanted when they were younger. Others may realize that their nest egg is not as large as they’d like, and want to learn more about getting cash out of their life insurance policy.
In many cases, a policy simply becomes too expensive to keep in force. Over $100 Billion in face value of life insurance is either voluntarily surrendered or lapsed each year by Americans over the age of 65. Nine out of ten seniors surveyed by the Insurance Studies Institute indicated that they would have considered selling their policy instead of letting it lapse if they understood the life settlement option.
Life settlement basics
Selling a life insurance policy through the life settlement process provides clients with a host of potential advantages. They can use the cash to meet their most immediate needs while eliminating the high cost of premium payments.
In a life settlement, an investor offers a cash payment to a life insurance policy holder in exchange for the policy itself. For people who want to get the most amount of money possible out of their whole life or permanent insurance policy before they die, a life settlement offers a well-regulated, safe, and reliable way to do so relatively quickly.
Investors see life settlements as an attractive asset class because they offer the ability to generate a stable return. Typically, investors are insurance companies, hedge funds, banks, and pension funds. This type of investment is often included as part of a well-diversified portfolio allocation.
In most cases, the cash offer for a whole life or permanent life insurance policy is about 20% of the policy’s face value. This figure varies depending on many factors, of course. While this amount is obviously a lot less than the death benefit, it’s also usually more than the cash surrender value, which is an average of 10% of the life insurance policy’s face value.
More than 90% of Americans live in an area where life settlements are regulated. The LISA (Life Insurance Settlement Association) website is an excellent resource for state-specific information on life settlement laws.
Life settlement funds may be taxable, depending on the individual’s situation. IRS Revenue Ruling 2009-13 covers life settlement taxation in depth. It’s important that the insured person check with their accountant to fully understand the tax consequences of participating in a life settlement before making a final decision.
Selling a life insurance policy to investors through a life settlement may be a good option for this type of client:
- Over age 65
- Owner of a convertible, permanent, or whole life policy with a death benefit over $100k
- Doesn’t need the death benefit
- Can’t afford high premium payments
- Policy issued by a highly-rated company
- Insured is a U.S. citizen and resident of the U.S.
In a survey prepared for The Lifeline Program, nearly 80% of clients thought their financial advisors should inform them about the life settlement option. Over half of seniors in the survey let their policies lapse because they saw it as a financial liability.
Seniors may consider selling their life insurance policy to investors for the following reasons:
- They need the financial resources provided by the sale to pay for rising health care costs
- Premium payments are prohibitively expensive
- Cash to improve quality of life in retirement is a priority
- Replacing the income of the insured in the event of their death is no longer a concern
A life settlement may not be ideal for every client. The beneficiaries of the life insurance policy will no longer be able to collect when the insured dies, and this may cause interpersonal problems.
Individuals involved in a bankruptcy or other debt situation should move forward with a life settlement with the full knowledge that the funds from the settlement may be subject to claims from creditors.
It’s also important to understand that the life settlement process may take four to five months to complete. Policy holders who need cash fast may not be able to get the relief they need promptly. Ovid can speed up the life settlement process by matching the insured and their advisor directly with institutional buyers who are interested in their policy.
Learning about the life settlement process and getting offers from life settlement companies doesn’t obligate the insured person to move forward in the process. There are other options for paying high premiums, such as taking out a loan against the policy to pay the premium or reducing the death benefit for a lower premium.
Participating in a life settlement is a process that should be approached carefully, and with as much information as possible. Consider consulting a tax professional, attorney, and financial advisor helps the policy holder make the best decision for their specific situation.
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Lingke Wang is the co-founder of Ovid Life, a life settlement exchange that instantly matches policyholders with institutional buyers.
Aside from his duties at Ovid, Lingke is also starting a second life insurance startup, Ethos. Ethos still in stealth stage, but its goal is to make life insurance easier to buy and more affordable for the average American.
