Combating Inflation with Life Settlement Earnings
Wednesday, October 13, 2021
Section: Financial Advisors

Everything is getting more expensive these days. Gas prices are higher, food prices are higher, used car prices are higher—it seems like nothing right now is immune from the effects of inflation. And it’s not going away anytime soon.

Inflation Hits Its Highest Point in Thirteen Years

In the twelve months ending in July, 2021, the U.S. experienced a 5.4% inflation rate, up from 1.4% the year prior, and far above anything in the last ten years. It’s the highest rate we’ve reached in thirteen years, when the Great Recession in August 2008 saw 5.4%. The financial experts at Kiplinger predict that this will continue through year’s end, and start to drop in 2022. But it will remain a heightened concern: “Expect inflation in 2022 to ease to 3% as shortages ease, but this will still be higher than the 2% average from 2016-19, prior to the pandemic. In short, stronger inflation is likely to stay with us for a while.”

Source: U.S. Inflation Calculator

Monthly 12 month inflation rate in the U.S. From July 2020 to July 2021

Source: Statista
Baby Boomers especially remember the woes of inflation, when gas shortages in the 1970s forced them to wait in long gas lines winding around stations. They are wary of what this might mean as they near retirement—and for their ability to fund it securely.
While it’s important for people to rethink their buying behavior to offset inflation’s effects, it’s also a good time to take a look at the other end of the equation—investments and other income generators. Many life insurance policyholders have a valuable asset in their life insurance, but don’t realize that it can be leveraged to counteract the effects of inflation. In fact, only 50% realize that their life insurance can be sold for cash. And a draw dropping 92% of life insurance policies end without paying out a death benefit, since they were surrendered or lapsed. As a financial professional with the fiduciary duty to protect your client’s best financial interests, it's incumbent on you to let them know about life settlement advantages. In fact, if you work for a life insurance company in these six states, it’s required by law. 


Life Insurance Policies Are Life Assets

Since the sales of life insurance policies are not tied to the stock market or the economy, they are a smart way to counteract the effects of inflation. You can help your clients bolster their financial picture in retirement by showing them the benefits of selling their policy. They can avoid increasing premiums and recoup more than they would if they let their policy lapse or were forced to surrender it. Since they would receive a lump sum, they could use a portion to handle rising everyday costs and most likely still have enough to invest in other goals, whether they’re helping to fund college educations for grandchildren, paying off debt, getting medical help or using that freed up cash for whatever important need they have.
Since so many people don’t realize that their life insurance policy is a financial asset, learning this is like found money right under their noses, especially when they haven’t given a second thought to their policy in years. You would do them a service by having their life insurance policies appraised.


Steps to Selling a Policy

As you’re aware, there are a number of steps involved in appraising a policy and selling it, and you can make it easy for your client by spelling them out ahead of time. Succinctly, they are:

  1.   Pre-Qualify: The policyholder confirms that they are 65 or older, provides basic medical information and details of their life insurance policy and reports any outstanding policy loans.

  2.   Pull Together Paperwork: They gather information about their insurance coverage and proof that they’re the legal policy owner, as well as a health statement, medical questionnaire, records from their doctor and any lifespan reports created by a medical underwriter. 

  3.   Start the Auction: They can skip these next three steps if they’re working with a life settlement company. If they’re working with a broker, this person will then present the policy to prospective buyers and field competitive bids. 

  4.   Manage the Auction: There are usually a few rounds of back and forth, with bids increasing each time. They may receive as many as 20-30 offers. 

  5.   Finalize the Sale: Their broker will provide them with a closing package and the funds are placed in escrow. Once the insurance company confirms that the policy owner and beneficiary have been updated, they will release the funds, less fees and commissions. Then the buyer takes over the premiums and becomes the new policy owner. 

  6.   Handle Post-Sale: As part of the sale, the buyer will check in with the seller now and then to confirm that they’re still living. The new owner will receive the death benefit when the seller passes away.

Life and viatical settlements are very straightforward. With a little bit of preparation, they can yield surprisingly lucrative returns. Now is a great time to talk to your clients about tapping these valuable assets, as the concern for inflation grows greater. By maximizing an asset your client already has, you can help them stay ahead of the increases and enjoy a more comfortable retirement, even as the world gets more expensive.