The statistics are published everywhere: Thousands of baby boomers are retiring every day. And this "best insured generation of all time" also struggles with paying bills and managing retirement expenses. Life settlements seem like a logical option, but how should advisors introduce the concept to clients and what do the transactions look like? Are they a good deal or not? Many are clamoring for details.
By: Stephen Terrell Advisor Perspectives, 30 June 2015 Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Stephen Terrell Photo The statistics are published everywhere: Thousands of baby boomers are retiring every day. And this "best insured generation of all time" also struggles with paying bills and managing retirement expenses. Life settlements seem like a logical option, but how should advisors introduce the concept to clients and what do the transactions look like? Are they a good deal or not? Many are clamoring for details.
I recently sat down with one financial advisor who truly believes that life settlements serve a great purpose for the right client in the right situation. And his case study is emblematic of how these transactions, which enable a senior to sell a life insurance policy for immediate cash, can be an appropriate option for the right client.
Advisor C.J. Christensen of Krupin Partners, LLC in Beverly Hills prides himself on learning about his clients’ needs and then offering options. And he’s the ultimate soft-sell guy.
”I know it sounds corny, but to me, all of my friends aren’t clients, but all of my clients become my friends,“ said Christensen.
For one recent transaction, Christensen made a connection with a senior through the client’s son. The father was aging, in his seventies, and continued to handle his own finances, but he had begun running decisions by his son as a matter of practice.
”One day the son called me and said that his father had two policies that were becoming burdensome and that he convinced his dad to speak with me,“ Christensen said.
It was a classic situation; the father had the same insurance agent for 30 years, but hadn’t heard from him in 10.
Over the course of several conversations, Christensen learned that the client hadn’t been paying into the policies for about a year as he worked on paying off a mortgage and managing other costs. Lean performance from his overall portfolio didn’t help the cause either. Paying the premiums was becoming difficult, and a life settlement was an option the client hadn’t yet considered.
But a life settlement wasn’t a done deal from the outset.
According to Christensen, clients get attached to the idea that they have been paying-in for a long time, and they are happy that their kids will get the money when they pass away. In these situations, he often starts the conversation by discussing life settlements with retained death benefits. With this type of transaction, the client keeps a portion of the death benefit and sells the remainder of the policy to a life settlement company. Retained death benefits are a fairly new concept and aren’t available in all states at this time.
In many cases, according to Christensen, once clients see the illustrations and the potential for an immediate cash payout, they decide to sell the whole policy instead.
After a number of detailed conversations, Christensen’s client chose to sell his $5 million whole-life policy and keep a second $1 million policy.
At the time of the transaction, the client was 74 years old and in below average health. The cash surrender value was negligible as the cash value was depleted when the client wasn’t making premium payments. Christensen found a buyer for the policy who paid his client $400,000. In California, licensed life settlement brokers are required to present the policy to multiple funding companies to secure the best offer. All offers are reported to department of insurance each year.
From his experience and knowledge of similar transactions and based on the multiple offers, Christensen believed it was a good value for his client and an offer well worth taking. From beginning to end, the entire sale took less than three months.
”Once the medical records are secured and the underwriting is completed, it moves fairly quickly,“ he said.
Within two weeks of the final offer, the client had his payout.
The $400,000 was essentially found money for the client as his cash surrender value was low, and lapsing the policy would have been even worse. For the advisor, the life settlement can be seen as a liquidity event, bringing opportunities many look for with ”money in motion.“
As for the proceeds, the client decided to use part of the money to take his wife and son on a road trip to the Grand Canyon, where the parents had gotten married – and check an item off the bucket list.
According to Christensen, many clients use the money to buy an annuity or other insurance product, but many others use it to pay down debt or spend it on themselves or their families.
“It’s important to remember it’s his money and I’m not going to pressure him into buying something else,” he said.
For advisors like Christensen, life settlements remain an option that more seniors need to learn about and research. Many advisors spend time evaluating policies and portfolios and never think of considering the life settlement option.
While not for everyone, life settlements can be a liquidity event that affords new opportunities for both client and advisor, or they can simply help a client cross an item off their bucket list. As we see from Christensen, both are fulfilling options.
Stephen E. Terrell is senior vice president of market development and branding of The Lifeline Program, a national life settlement funding company. You can follow him on Twitter @LifelineProgram or at linkedin.com/in/stepheneterrell.
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