Consumer Advisors

Why Sell?

Life insurance is a core part of the American financial fabric.  

According to the ACLI 2013 Life Insurance Fact Book, “People buy life insurance to protect their dependents against financial hardship when the insured person, the policyholder, dies… A business may purchase life insurance to protect against the economic loss that would result from the death of the owner or a key employee.”  

Life insurance is an important investment in many seniors' portfolios and businesses strategies.

There are 38 million life insurance policies owned by American seniors over the age of 65, which have a collective face value of more than $3 trillion. An individual, trust or business that owns a $500,000 policy with annual premiums of 4% of the face value will invest $20,000 each year to keep the policy inforce. Over five years, that amounts to $100,000 and over ten years it comes to $200,000.  

Reviewing and analyzing whether a life insurance policy continues to be needed or is affordable is as important as reviewing and reallocating all assets held by consumers and businesses.

Did you know?

  • An astounding $100 billion+ in face value of life insurance is lapsed or voluntarily surrendered each year by seniors over the age of 65. 

  • A 2010 survey prepared for the Insurance Studies Institute indicated that 90 percent of seniors who have let a policy lapse would have considered selling it if they had known a life settlement was an option.  In addition, 49 percent of advisors cited lack of knowledge as the reason for not recommending life settlement option to clients.

  • A 2012 survey prepared for The Lifeline Program (conducted by ICR) indicated that 79 percent of clients feel advisors should inform them about the life settlement option. Another study conducted in 2013 by the same group indicated that 55 percent of seniors allowed their life insurance policies to lapse, viewing it as a liability instead of an asset.”

 


When a life insurance policy is no longer needed, wanted or affordable the option of selling it can maximize the asset value and minimize losses for your clients.

“Advisors have a moral, if not a fiduciary responsibility, to understand and inform their clients about options available with unneeded or unaffordable life insurance policies, including a possible sale of the policy.”  

Darwin M. Bayston, CFA, President and CEO, Life Insurance Settlement Association


What is a life settlement?

A life settlement is the sale of a life insurance policy to a third party for a value in excess of the policy’s cash surrender value, but less than its face value, or death benefit.  A policy owner receives a cash payment, while the purchaser of the policy assumes all future premium payments and receives the death benefit upon the death of the insured.  




There are numerous reasons your clients may consider selling a life policy:

  • 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.

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

  • The need to eliminate future premiums payments but keep some life insurance.    

  • There is a need for resources to pay for health expenses and long-term care. 

  • A business no longer needs key-man insurance. 

  • Premiums of policies owned by trusts continue to rise. 



The sale of a life policy is not for everyone. 
There are alternatives other than selling a policy that may be appropriate for a policy owner’s circumstances:

  • Keep the policy inforce through a loan or use of the cash surrender value.

  • Seek an accelerated death benefit, if available.

  • Assign the policy as a gift or charitable contribution.

  • Covert a term policy to permanent insurance.

  • Reduce the death benefit with a lower face value and lesser premiums.

  • Lapse or surrender the policy.

Candidates

Candidates for life settlements are typically age 65+ or older and own a life insurance policy with a face amount in excess of $100,000.

 A settlement is only possible when the policy’s market value exceeds the cash surrender value.
Key factors in determining the market value of a policy are the death benefit, the cost of future premiums, and the life expectancy of the insured.

Life expectancy is the key component in determining the market value of a life settlement transaction.

The lower the premiums and the shorter the life expectancy, the higher the selling price. This is because the greater the amount of premiums that need to be paid and the longer the investor must wait for the death benefit, the lower the policy value.

Key characteristics of the settlements market generally include:

● Insureds age 65 or older
● Insureds with life expectancies of less than 12 years
● Insured may have one or more health impairments
● Universal life, term life and 2nd to die policies are most common settled.

It should be noted that a life settlement is not an option for every policyowner.

Policy Value

The value of an insurance policy being sold is based on the present value of the expected cash flows over the life of the investment.

When a life insurance policy is sold, the seller receives a cash payment.  The buyer pays all future premiums and receives the death benefit upon the death of the insured.

There are four components to determining the value of a life policy"

  1. Amount of the death benefit
  2. Remaining expected life of the insured
  3. The amount of premiums to be paid until the death benefit is paid
  4. The discount rate or investor required rate of return

The amount received from a policy is a mathematical determination of taking into account the impact that each of the factors has on the value.  The higher the premiums, the longer the life expectancy and the higher the required investor’s return, the lower the value of the policy. Conversely,  the lower the premiums, the shorter the life expectancy and the lower the investor’s required return, the higher the value of the policy.  

Every case is different. In all cases, the death benefit is known and, in most cases, the amount of annual premium payments can be determined within a reasonable probability. The expected remaining life of the insured is the factor with the greatest variability and therefore represents the greatest risk to the investor. Predicting how long any one individual will live is uncertain, based on one’s age, gender, health and lifestyle.  

The discount rate required by an investor is based on the perceived risks and uncertainties associated with the policy cash flows as well as returns in the marketplace for investing in other assets.

The selling price of a life policy will always be greater than the cash surrender value but less than the death benefit.

The ultimate selling price is influenced by forces in the market that determine what investors are willing to pay at any point in time.
Helping Clients

Advisors serve a special purpose in counseling and managing their clients’ financial needs and options.

An advisor should review every aspect of a client’s portfolio to determine if the assets within are performing properly.

Often overlooked are performances of life insurance policies.

A life insurance policy is an investment like equites, fixed income or real estate,  and should be reviewed from time to time to see if it still meets the needs for which it was initially purchased. There are times when an advisor or policy owner may conclude that the proceeds from the sale of a policy could be deployed in a better performing investment.




It is the advisor's role to help their clients explore all of their options, including a life settlement, when a policy is no longer needed, wanted or affordable.


If a senior determines that a life settlement is the right alternative for their particular situation, an advisor can add significant value to the transaction on behalf of their client

An advisor’s important role in a life settlement transaction is to protect their client. In addition to representing their client’s best interests, an advisor should confer with state laws to ensure all needs are being met and laws and regulations are being followed by all parties.


Benefits to you

According to a 2014 study by Penton Research, the vast majority of financial advisors are either unfamiliar with life settlements or are familiar with them but have never recommended them to clients.

Meanwhile, another 2014 survey by WealthManagement.com found that nearly 50% of advisors agreed that clients who plan to let their coverage lapse should consider selling that policy. This disconnect suggests that many advisors are simply unaware of how life settlements work and how they can benefit their clients.

In addition to the benefits to clients, advisors themselves can also benefit from working with their clients to pursue a life settlement.

The primary benefit is that life settlements present an opportunity for your clients to liquidate an asset in their portfolios and put that new cash to work for either their cash flow needs or for other investments you may wish to recommend. This provides a vehicle for financial advisors to advance client portfolios and bring more assets under management.

A recent study on life settlements reported that the average life settlement value is 20 percent of the life insurance policy face value.

Compare this value with the average cash surrender value paid out by insurance companies, which amounts to only 10 percent of a life insurance policy’s death benefit. Our research shows that Americans who are aged 65 or older leave approximately $112 billion in benefits on the table each year by lapsing or surrendering their life insurance policies. A life settlement is one option for capturing some of those benefits rather than forfeiting them back to the insurance companies.

On average, policy sellers receive anywhere from four to seven times the amount of the policy's current cash surrender value. There are four main components determining the value of a life insurance policy:

  1. The age and medical condition of the insured;
  2. Type of life insurance policy (e.g., universal life, whole life, term);
  3. Amount of the death benefit; and
  4. Amount of premiums necessary to keep the policy in force.

Naturally, the largest settlements will be offered for a higher death benefit, a lower premium and a shorter life expectancy, but in every case the amount your client will obtain will be more than the cash surrender value and less than the death benefit on the policy. 

Other benefits to you from recommending the life settlement option to appropriate clients include the following:

  • Enhanced relationships – you can make yourself a more deeply trusted advisor to your clients by conducting truly holistic financial planning that considers the potential value of all assets in portfolios, including life insurance policies;

  • Commissions – depending on your state regulations and business agreements you may be entitled to certain referral fees or commissions for completed life settlement transactions;

  • Competitive differentiation – helping your clients turn unwanted or unaffordable life insurance policies into new cash for their portfolios can be a powerful way to differentiate yourself from other advisors;

  • Obtain new clients – by recommending a creative and safe financial planning option to existing clients who are able to unlock hidden value in their life insurance policies, you may generate personal referrals to new clients; and

  • Build trust with families – serving as a trusted advisor who presents clients with a full range of supplemental retirement income options will help cement relationships with those individuals and their family members.

A life settlement is an important addition to an advisor’s toolbox of financial planning options. By selling your clients’ life insurance policies through a “secondary market” to institutional investors, they can benefit from their life insurance today and use that cash for their immediate needs. Life settlements generate liquidity and provide your clients with more cash to put to work in their portfolios.

Sales Process

A life settlement is usually accomplished through the efforts of a number of market intermediaries.

Participants in a life settlement transaction generally include:

  • The owner of a life insurance policy or the insured individual whose life is the subject of the life insurance policy;

  • A producer who may be a financial advisor or an insurance agent;

  • One or more life settlement brokers who may also be licensed as insurance agents;

  • One or more life expectancy underwriters;

  • One or more life settlement providers who typically represent the party acquiring the policy; and

  • One or more investors.

There are nine key steps associated with the life settlement process. These include the following:

 1. Need Realized. The consumer realizes a need or an advisor suggests to the consumer that he/she can sell the policy

 2. Application. The policy owner completes settlement application and provides necessary documentation.

 3. Documentation. The settlement provider acquires supporting documentation that verifies insurance and medical status. Settlement companies can work with either the advisor or directly with the policy owner.

 4. Review. The settlement provider’s insurance and medical experts review the file, determining its ultimate viability, including a review for potential fraud. Companies will competitively bid on the purchase of an existing policy based on the insured’s current age, state of health and the overall economic environment.

 5. Policy Match. The settlement provider determines suitability for sale, and matches the policy for appropriate funding. At this point, the settlement company can also determine that the settlement does not qualify, which ends the process.

 6. Offer. The settlement provider relays the offer to the client's advisor or ultimate buyer. If the offer is declined, the policyholder can seek other offers with other settlement providers.

 7. Closing Package. If the offer is accepted, a closing package is delivered to the advisor or client for review and signatures.

 8. Notification. The signed documents are returned and the insurance carrier is notified.
 
9. Funds Transfer. Upon written verification of change of ownership, settlement funds are transferred to the selling policy owner from the Trustee’s Escrow Account.

When the transaction is complete, the buyer – or life settlement provider – becomes the new owner of the life insurance policy, pays future premiums and collects the death benefit when the insured dies. The proceeds of the sale can be used in any manner the seller sees fit.

Are these transactions legally recognized?

Is the life settlements industry regulated?

Do I have any fiduciary obligations?

See All Frequently Asked Quesions

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The Life Insurance Settlement Association (LISA) today endorsed H.R. 5958, the “Senior Health Planning Account Act”, introduced by Rep. Brian Higgins (D-NY) and Rep. Gregory Steube (R-FL).

WASHINGTON, DC, March 3, 2020 – The Life Insurance Settlement Association (LISA) today endorsed H.R. 5958, the “Senior Health Planning Account Act”, introduced by Rep. Brian Higgins (D-NY) and Rep. Gregory Steube (R-FL).  This bipartisan legislation will help millions of seniors generate billions of dollars for their health care needs through the sale of their life insurance policies – known as a life settlement – by permitting them to use the proceeds, tax-free, to pay for their health care costs.

The Senior Health Planning Account Act will help seniors plan and pay for their health care costs, including long-term care expenses, before they hit. 

Under the Act, seniors will be able to roll over their life insurance sale proceeds, tax-free, into Senior Heath Planning Accounts, which would be dedicated to paying health care costs for themselves and their spouse. The Accounts would be exempt from federal income taxation, similar to existing federal tax programs that encourage younger working Americans to invest in their own health care. 

Current law already provides that the proceeds from the sale of life insurance—known as life settlements—are tax-free, but only if the policies are sold after the policy holders are seriously ill, by which time they often no longer own their policies.  The Senior Health Care Account Act builds on current law to provide seniors needed flexibility to plan for future expenses. 

The Senior Health Planning Account Act is expected to result in substantial Medicaid savings because private resources would be used to pay expenses otherwise borne by taxpayers. The Act also is expected to generate substantial tax revenues.

“We applaud Representatives Higgins and Steube for creating a way for American seniors to deal with the crushing costs of health care in retirement,” said Chris Conway, Chair of LISA’s Board of Directors, adding “This is an innovative private sector solution to address the escalating costs of health care burdening not only American seniors, but state and federal Medicaid budgets.”

“H.R. 5958 will allow millions of seniors to use life insurance assets they already own to help provide for their own health care in retirement,” said Michael Freedman, Chair of LISA’s Public Policy Council. “Seniors are the only group of Americans who are not eligible for existing tax programs for contributing their own resources to help pay for health care,” added Freedman.

Life insurance policies are among many families’ most valuable assets, with 138 million individual life insurance policies, with a total face amount of over $12 trillion, in force in 2018. Yet fewer than one in ten policies (by face amount) ever pay a death benefit, with over 90 percent ending in a lapse or surrender.

In 2018, 7.7 million policies, with an aggregate face amount of $570 billion, lapsed, for which policyowners received nothing.  That lapse rate that was 40 percent higher than just five years earlier, and, for retirees, the lapse rate is 25% higher than for policyholders generally.

Seniors who sell their life insurance policies receive significantly more than if they terminate their policy back to their insurance company.  In a 2017 report, the National Association of Insurance Commissioners (NAIC) stated, “Policyowners who sell their policies receive a lump sum payment that is generally four or more times greater than if they lapsed or surrendered their policy, according to government and university studies.”   Life settlements are highly regulated by state insurance departments through extensive licensing requirements for buyers and brokers and standards ensuring the strongest senior consumer protections.

As more and more seniors are faced with the challenge of how to pay for the increasing costs of health care, including very expensive long-term care, life settlements can help. The NAIC endorsed life settlements as “one option seniors might use to generate resources to pay for their long-term care needs,” in a 2017 report focused on private market options for financing long-term care.

Bryan Nicholson, LISA’s Executive Director, called on Congress to adopt H.R. 5958, stating “The Senior Health Planning Account Act will increase awareness that life insurance policies are an asset that seniors don’t have to lapse or surrender back to insurance companies. Life settlement proceeds will provide billions of dollars of living benefits for seniors to use for their own health care.”

Resources:

The Life Insurance Settlement Association (LISA) is the nation’s oldest and largest organization representing participants in the life settlement Industry, with a current membership of more than 70 companies doing business in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. LISA’s mission is to promote the development, integrity and reputation of the life settlement industry, to advance the highest standards of practice and professional development for the industry, and to educate consumers and advisors about a life settlement as an alternative to lapse or surrender of a life insurance policy. For more information, please visit www.lisa.org

 

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