What is a Life Settlement?
A Life Settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit.
Many American seniors—typically those 70 years of age or older—are discovering that life insurance policies that once seemed appropriate, no longer meet their needs. Unfortunately, the life insurance companies that sold them the policies in question may not offer real advice or solutions.
The insurance companies do allow their customers to “surrender” their policies, which means the policyholder will be offered a mere fraction (typically 3-5%) of the policy’s face value. However, they often discourage their personnel from telling customers that they can realize far better cash outcomes thus obtaining far greater payoffs on their existing policies – through life settlements.
As stated above, a life settlement is the sale of an existing life insurance policy for more than its cash surrender value but less than its net death benefit. Such transactions, usually undertaken for the purposes of estate or financial planning, put choice in the hands of American consumers.
As this page will show, life settlements represent an important option for a growing number of people who may have thought that they had no options at all. Rather than continuing to pay premiums on a policy that no longer serves its original purpose, life settlements offer consumers payoffs that can be significantly greater than surrendering a policy. Life settlements offer a reasonable and profitable exit strategy that addresses the financial objectives of policyholders.
In Search of Options and Opportunities
Changing priorities or dissatisfaction with life insurance policies have driven many policyholders to discontinue their existing life insurance policies. While policy owners have had a legally protected right to sell (or “assign”) a life insurance policy for almost a century, until recently, very few have taken advantage of this opportunity.
Here are some of the factors encouraging insured individuals to reconsider the value and necessity of their current policies:
A Paradigm shift in consumer thinking. Americans have an extraordinary amount of choice in most products and services. Similarly, they have come to expect the same amount of freedom to maximize value in the realm of life insurance. They are recognizing that life insurance is merely one asset within an estate or financial portfolio that should be managed for optimum outcomes. They are no longer willing to treat life insurance as an “untouchable” product that must always be held until death.
Guidance from their financial advisors. As the poor performance or under-performance of certain life insurance (particularly universal life) policies becomes increasingly clear over time, financial advisors – and even the independent agents who originally sold the policies – are exploring options with their clients. Financial advisors, who are increasingly attuned to the changing needs and priorities of their customers over time, may suggest alternatives. Many independent insurance agents, who have an inside perspective on how individual policies have performed, are beginning to discuss options with clients. Most insurance companies, in contrast, do not fully advise their clients about their choices.
Feathering the empty nest. As Americans enter their senior years, they often experience unexpected changes that alter their priorities. Policies that once made sense for them, may no longer make sense under new circumstances. For instance, decisions that seemed appropriate when policyholders had children in the house may no longer seem appropriate once the children are grown and have moved on. These life changes may drive some seniors to decide that a given life insurance policy is no longer relevant and that other steps should be taken to achieve full financial empowerment.
Dissatisfaction with existing policies. Whether the driver is changing circumstances, better financial options or the availability of superior policies that render old ones obsolete, many seniors may find themselves dissatisfied with their existing policies. Indeed, quality improvements in insurance policies over the years are driving individuals to abandon policies they consider to be outdated.
Escalating policy premiums. Many people are not prepared for the steep escalation in premiums that accompanies ownership of many policies. Moreover, they may be hit with these policy increases at the precise time that they are experiencing mounting health care costs and other financial concerns. Under such circumstances, a policy may seem to be a lower priority than it might have been in the past.
These factors have created the demand for alternatives among many who now hold life insurance policies. Such alternatives are now becoming visible to consumers.
Policyholders Have Unanswered Questions
Increasingly, policyholders have questions for their life insurance companies:
Are there more attractive alternatives than to surrender a policy? Is it possible to recover money necessary to make new investments and more effectively manage the financial estate? If new policies that offer lower premiums and better guarantees are now available, is there a way to transition to a new policy without incurring financial punishment? If life circumstances change, is there a way to sell the policy and still realize a fair settlement? What are the available options?
Unfortunately, the life insurance companies offer no real answers to these questions. Customers do have the option to “surrender” their policies, which means the policyholder will be offered a mere fraction of the policy’s face value. Insurance companies are requiring life settlement companies to inform seniors about the accelerated death benefit option. However, they are not informing seniors of the option for a life settlement.
Often, policyholders let policies lapse, in which case they receive nothing – not even a minor surrender payment – for their years of premium payments. Their contracts are simply null and void.
There are even cases where a spouse, who was previously responsible for the bills, has died, and the life insurance policy goes unrecognized. There are others where family members take responsibility for an individual who suffers from Alzheimer’s or some other serious debilitation late in life, but are unaware of – and, thus, neglect to pay – a life insurance bill. Such cases are simply and coldly classified as “lapsed policies,” but there is obviously a severe cost to consumers.
Reasons for Abandoning a Life Insurance Policy
There are many reasons that life insurance policyholders might begin to question whether it is prudent to continue to hold and pay premiums on existing policies. Among them:
The policy is no longer needed or wanted. As the circumstances of life change over time, so do insurance needs. Policies that may have made sense at one point may no longer serve a useful purpose at a later date. Perhaps a spouse or another beneficiary for whom the policy was purchased is now deceased. Maybe other policies prove adequate to cover the original goals and provide necessary protection.
Opportunities to obtain a superior insurance policy. There have been dramatic changes in the insurance market in recent years. As a result, policyholders may determine that they can obtain better, more expansive coverage with lower premium payments in the current market.
Premium payments have become unaffordable. In many cases, large or escalating premium payments can prove to be a tremendous financial burden for policyholders, particularly in their elder years. They may need to get out from under the burden of making these payments in order to sustain a good quality of life.
Changes in estate planning needs. The financial markets have created powerful new opportunities for smart investors in recent years. As financially adept consumers seek to maximize the value of their assets and estates, they may find investment vehicles that offer a superior return to existing life insurance policies.
Rising healthcare costs or mounting financial concerns. Health problems and other unforeseen difficulties can create circumstances that increase financial burdens and needs. Under such circumstances, existing life insurance policies may not be considered as relevant as more immediate concerns.
Whether policyholders possess term policies, universal life policies or whole life policies, they can easily find themselves in circumstances where their existing policies no longer make sense. Indeed, a growing number of individuals have come to that conclusion. Unfortunately, their insurance companies tend to be less than helpful at that point.
Life Insurance Companies Offer No Viable Exit Strategy
There are countless scenarios that might encourage a policyholder to seek alternatives to existing life insurance arrangements. The problem is that insurance companies merely offer their customers two choices: lapse or surrender. If the policy lapses, then the contract becomes null and void and the customer loses all of their investment. If the customer chooses to surrender the policy, then the payout is typically only 3-5% of the policy’s face value.
Considering the high and often escalating premiums that policyholders often pay over time to keep their policies in force, it’s an unfair and unacceptable outcome. In trying to abandon their policies, consumers lose the cash value buildup in them – the element that makes them an asset.
There is absolutely no reason to hold onto an unattractive policy when higher guarantees and higher coverage at lower premiums are a market option. Why accept highly invasive surgery – and months of rehabilitation – when you can have a high-tech, minimally invasive procedure performed instead? Why rent an old phone from Ma Bell – and pay $3 a minute to call your grandchildren – when you can own a wireless phone and pay 10 cents a minute?
Obviously, markets drive innovation, change, and quality improvements. They offer us all an endless parade of choice.