Americans have an extraordinary amount of choice in most products and services, and have come to expect the  same freedoms to maximize value in the realm of life insurance.

A life insurance policy is a form of property such as a car or a house. Policyowners are free to sell and transfer ownership of their policies. Rather than continuing to pay premiums on a policy that no longer serves its original purpose, life settlements offer payoffs that can be significantly greater than surrendering a policy.

As Americans enter their senior years, they often experience unexpected changes that alter their priorities regarding life insurance. Policies that once made sense at the time of purchase often no longer make sense under new circumstances.  

There are countless scenarios that might encourage a policyholder to exit a life insurance arrangement. Insurance companies mainly offer their customers two choices: lapse or surrender. A life settlement is a third option available to some. This type of transaction is a revolutionary option for a growing number of policy owners.

The main reasons clients may need to sell a policy are the following: 

  • The premiums are no longer affordable;

  • The need to replace lost income in case of death of the insured no longer exists;

  •  A term policy may be reaching the end of the coverage period;

  • Funds are wanted to improve a retirement lifestyle; and

  • The need for funds to pay estate taxes no longer applies.

Other reasons why your clients may choose to sell their policies:

To eliminate future premiums but keep some insurance

A policy owner who does not want to continue paying premiums on a life insurance policy, but still wants or needs some life insurance coverage for future generations may opt for what is called the "Retained Death Benefit" option . 

For example, assume a 60-year-old purchased a life insurance policy with a $1,500,000 death benefit. However, when he turns 75 years old his kids have become adults, have now moved out and are financially stable, but he has a special needs grandchild to whom he wishes to leave a specific bequest. Instead of selling the entire policy for a lump sum cash payment, he could sell a portion of the death benefit either in lieu of cash or as reduction to the cash purchase price. For example, the policy owner might agree to sell $1,000,000 of the death benefit in exchange for a $500,000 retained death benefit. This means that even though he has sold his rights to the policy, and no longer has to make another premium payment, his estate (or designee) will receive $500,000 upon his passing.

While this option in not available in all states, it doesn't hurt to know about it and discuss it with your clients and members of the Life Insurance Settlement Association.

Due to an under-performing life insurance policy owned by a trust
 

Several life settlement transactions involve Trust Owned Life Insurance Policies. Unfortunately, many trusts contain an under-performing life insurance policy that may result in the trustee having to ask the grantor for more money to keep up with the premiums. It’s important that a life insurance policy is not overlooked by those managing the overall trust. A well-versed trust officer could recommend the sale of a policy through a life settlement for portion of its face value, prior to a lapse or suggest replacing it with a new, more modern, and better performing life insurance policy that would provide better financial performance and not necessitate the influx of additional monies from the grantor.

A business no longer needs key-man insurance

Many companies purchase key-man insurance to protect themselves from unforeseen losses in the event of death or disability of a particular key employee. However, over the years these key individuals may move to other less critical positions or leave the company. Subsequently, companies end up in a difficult scenario by having to pay expensive premiums on unwanted policies. Dropping the coverage altogether can be costly since so many premiums payments may have already been paid, especially if the policy has been held for many years. An attractive alternative would be to sell the policy on the secondary market for life insurance, through a life settlement, whereas the policy owners would sell their life insurance policy for more than the surrender value, less than the face value. It’s important to note that even some convertible term policies may qualify.

The need to fund Long-Term Care

Many families are in need of means to fund expensive long-term care. The life settlement option can help families looking for alternative ways to pay for senior care services, such as home care, assisted living, nursing home care, memory care and hospice. It's possible to convert life insurance policy into a long-term care benefit plan. Universal, Whole Life, Term and Group Policies with with a death benefit over $10,000 may qualify.

Did you know?

  • Some states have recently started passing notification laws to ensure consumers are informed by the state’s Medicaid Department that this program is an accepted part of a Medicaid excess income program sometimes referred to as the “Spenddown program”.
  • Texas and Kentucky have passed laws and numerous others states are expected to follow.
  • Policy owners that are not aware of the life settlement option will learn about it because one of the provisions of this new law is that the state must educate and inform policyholders about life settlements.
  • The most important aspect of this change is that it gives freedom of choices to the policy owner.
  • Seniors will not have to use any long-term care services that Medicaid assigns them. They will have the option to use their own private funds in order to pay for it and choose the provider and type of services they receive.