500,000 seniors a year will “lapse” their life insurance policies, meaning they stop making the premium payments on them and let them go. They walk away with very little or nothing. The reason this happens is that the policy is no longer wanted, needed, or affordable, and they do not know there is another option. The good news is, there is – a life insurance settlement.
Let’s start from the beginning:
Ever since Benjamin Franklin helped start the first life insurance company in the U.S. in 1759, life insurance has been a key part of our lives and financial planning. Today, the U.S. is the leading life insurance premium writing country in the world with over 290 million life insurance policies in force amounting to approximately $20.3 trillion in face value. Just policyholders 65 and older have 38 million policies in force with a face value of more than $3 trillion.
The Life Insurance Settlements Association’s (LISA) own research shows that Americans 65 or older leave over $100 billion in benefits on the table each year by lapsing or surrendering their life insurance policies. Many clients think they only have three options: pay the premium, lapse the policy, or surrender the policy.
Simply put, a life insurance settlement is the sale of a life insurance policy to a third party (usually an investor group) who gives the client cash for the policy. In turn, the buyer becomes the new owner of the policy, pays the premiums, and receives the death benefit when the policy matures. The client benefits from receiving substantially more than the surrender value for the policy. According to a 2014 London Business School Study, “Americans who sold their unwanted life insurance policies, collectively received more than 4 times the amount they would have received had they surrendered them to their life insurance companies”. Even term policies have value.
Yet, the vast majority of people do not know about life insurance settlements, including some insurance and financial advisors. Let’s answer some common questions:
What type of policies can be sold?
All types of life insurance policies can be sold, including universal life, whole life, term, second-to-die, and group policies. Universal life is the most common type of policy sold, followed by term and then whole life.
How can term policies be sold, they have an end date?
The key is that the policy must be convertible into a more permanent type of policy like universal or whole life. And, the policy cannot be past the conversion deadline. Many term policies, if convertible, have conversion deadlines based upon the age of the client, or on the length of time, the client has been insured. Some have conversion deadlines corresponding to the end of the policy term. So check your policy. It will tell you when your conversion deadline is. This is usually found in the first few pages of the policy or datasheets, or it can be in the policy itself. Look at the Table of Contents for the word “Conversion ”. Every insurance company is different, but it will probably say something like “Conversion Option” or “Conversion Privilege”. Looking into a life insurance settlement before the conversion deadline is important. Ideally, starting 6 months ahead of the deadline allows plenty of time to complete the settlement. Sometimes, even a non-convertible term can be sold, but that is not very common.
Do I have to be sick to sell my policy?
The short answer – No! The life insurance settlement industry essentially started in the 1980s as viaticals, with terminally ill AIDS patients selling their policies to pay medical bills or improve their quality of life. The market has changed dramatically since then. Life insurance settlements are completely different, focusing on clients who no longer want, need, or can afford their policy.
An investor does consider a client’s health and life expectancy when determining how much to offer on a policy. It is true that the shorter the life expectancy, the higher the value paid for the policy. But, that does not mean that clients who are relatively healthy cannot sell their policy. An investor also considers the premiums that need to be paid and the face value of the policy in making a determination about how much to offer a client. There are many instances where investors are willing to purchase the policy of a relatively healthy individual. Every client’s situation is unique, but their relative health does not preclude them from selling their policy.
How big does my policy have to be to sell it?
Each investor has their own parameters surrounding the types of policies they wish to purchase. Some investors only want to look at policies over $500,000 of face value. But, we know investors who will look at policies as low as $100,000 in face value, and in some rarer instances, even below $100,000.
Why would I want to sell my policy?
As mentioned earlier, most people sell their policy because they no longer want or need coverage. Many times, clients purchased the policy 10, 15, or 20 years ago, but now, the reason they originally purchased the policy is no longer relevant. The policy is simply not needed any longer. Some examples are: a client has retired and no longer needs the income replacement; their home is paid off; a spouse has passed away; a client sold their business, so the “key person” policy is no longer needed; a rental property or significant asset has been sold, making the policy purchased to cover payment for that asset unneeded. Additionally, the Tax Cuts and Job Act (TCJA) of 2017 also helped make a large number of life insurance policies unneeded. By more than doubling the estate tax exemption from $5.49 million per individual to $11.2 million, and $10.98 million for married couples to $22.4 million, life insurance policies purchased to cover estate taxes also may no longer be needed. This change is estimated to reduce the number of estates subject to the estate tax by about two-thirds.
Policies also become unwanted: a term policy that is about to expire; some universal life policies are becoming unaffordable as they mature; cash values in the policies have been depleted; or due to a change in finances, policies become too expensive to maintain. There are some adjustments that can be made to these types of policies to make them more affordable. Please consult your insurance or financial professional for assistance in discussing these options. But if the decision has been made that the policy is no longer appropriate, a life insurance settlement can be a good option.
What can I do with the money I receive?
Short answer – anything! Selling your life insurance policy can be a good way to bolster savings, increase retirement income, make home modifications, take that long-awaited vacation, pay for assisted living, memory care, or home care, pay down debt – anything!
Do I have to sell the entire policy?
Not always. A client may choose to sell only a portion of their policy. A good example is a client who has a $1.5 million term policy but is retiring. It is still convertible. The mortgage is paid off so she doesn’t need all of the coverage and doesn’t want to pay the premiums anymore for all $1.5 million. But, she still would like some death benefit. She has chosen to sell $1 million of her policy and retain $500,000 in death benefit. Another option is called a retained death benefit. Most policies sell for all cash, but sometimes depending upon the circumstances, a smaller death benefit can be maintained for beneficiaries, without cost. This is not common but demonstrates the flexibility that a life insurance settlement can have to take care of a client’s needs.
What age do I need to be to qualify?
The good news is there is no qualifying age. Age can be very relevant in determining what an investor will offer a policy. Generally, life insurance settlements are best for clients age 65 or older, but that is just a guideline. The challenge with guidelines is there can be exceptions, so don’t hold too fast to that number. As stated before, each client’s situation is unique and personal, and each investor group also has its own unique parameters. Typically, investors prefer clients with policies who have 10 – 15 years of life expectancy or less…sometimes 20 years. We have several clients right now in their late 50’s. A life insurance settlement broker, who works with many different investor groups, can offer solutions for each unique client situation.
Do I need to be in a certain income bracket to qualify?
A life insurance settlement can be a good option any time a policy is not needed or wanted. With policy face values from $100,000 being sold, a life insurance settlement is very accessible for many people.
I’ve never heard of a life insurance settlement. Are they legal?
Believe it or not, a U.S. Supreme Court decision in 1911 paved the legal foundation for life insurance settlements. Justice Holmes said in his decision, “it is desirable to give to life policies the ordinary characteristics of property…To deny the right to sell except to persons having such an interest is to diminish appreciable the value of the contract in the owner’s hands.” What does that mean? A life insurance policy is an asset, like a car or house. The owner of a life insurance policy has the right to transfer it to whomever they choose. So, life insurance settlements are not illegal, but what about being regulated? The life insurance settlement industry is highly regulated. 43 states and the territory of Puerto Rico regulate life insurance settlements specifically, affording protection and transparency for approximately 90% of the U.S. The National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL) have also been very involved in crafting model language and disclosure notices to protect consumers, which have been adopted by the majority of states. Disclosures include transparency in the offer details, sales commissions, alternatives to selling a policy, risks of selling a policy, and more. Further, sellers must be deemed competent to enter into a life insurance settlement agreement, and beneficiaries consent prior to a policy being sold. There are also mandatory waiting periods before someone can sell their life insurance policy. In California, the waiting period is two years, with very limited exceptions such as the owner of the policy is terminally ill, a spouse dies, divorce, retirement from full-time employment, physical or mental disability, disposition of ownership interests in a closely held corporation or an order or judgment from a court. As a result of this regulation and transparency, there have been no consumer complaints against a licensed life settlement company since 2012.
The Insurance Studies Institute found 90% of seniors surveyed would have considered a life insurance settlement, had they known about them. With the number of seniors projected to continue rising from 42 million in 2012 to an estimated 70 million in 2030, the life insurance settlement market will continue to grow. A “hidden asset” that a client was going to lapse and collect nothing, turns into “found money”. Life insurance settlements are not appropriate for everyone. We work with financial, insurance, and legal professionals daily to help their clients and highly suggest you consult your advisors before considering a life insurance settlement. But if all of the alternatives have been considered, and the decision has been made to lapse or surrender your life insurance policy, a life insurance settlement can offer you significantly greater value. It can’t hurt to try – it can only hurt not to.
Lisa Rehburg is President of Rehburg Life Settlements, a life insurance settlements broker. Ms. Rehburg is energized by helping clients benefit from their unwanted or unneeded life insurance policies. Rehburg Life Settlements is proud to work with financial, health care, insurance and legal advisors across the country. By having access to many investor groups, Rehburg Life Settlements can place more policies and realize the best offer for a client’s policy. Ms. Rehburg has been in the insurance industry for over 30 years. She can be reached at (714) 349-7981, email@example.com or see our introductory video at www.rehburglifesettlements.com.