Don’t Irrationally Lapse Your Policy

A great many Americans own life insurance, with some
$20 trillion of face in force.  But while so many have received education regarding the importance of the primary insurance market, the same cannot be said of the secondary market.  As a result of the lack of awareness of that secondary market – that is, the ability to sell a life insurance policy -- far too much life insurance is “irrationally lapsed” each year.

According to a joint study by the Society of Actuaries and LIMRA, approximately $900 million of face value of life insurance is lapsed or surrendered each year.  That is roughly 4.5% of the insurance that is in force.  Some terminate for good reason.  Term policies that serve a purpose are meant to be lapsed and some permanent policies have little worth beyond surrender value.

However, Conning estimates that there is $180 billion of face each year that terminates irrationally in that the policies could have been sold for more than any funds received.  When the Insurance Studies Institute (ISI) asked seniors why they lapsed such policies, 90% referenced that they did not know they could sell their policy.  When advisers were asked why they did not educate their clients, 50% of advisers were similarly uninformed about the life settlement market.

There is a win/win/win for consumers, advisers and investors that can be accessed through consumer education regarding the life settlement market:

  • Policy owners who no longer want or need life insurance can monetize the policy and obtain much-needed revenue for living in retirement;
  • Advisers can differentiate themselves and add value for their clients by discussing the life settlement option; and
  • Investors can purchase policies with Internal Rate of Returns (IRRs) in the mid-teens and provide a liquid secondary market for policy owners.

I would even argue there is a win for insurance companies through life settlements.  It is true that insurance companies profit when policy holders lapse policies without ever receiving a death benefit.  Yet surely clients considering purchasing life insurance would consider it a selling point that there is a secondary market for the insurance if their situation changes.  This could lead to more sales for life insurance agents and companies.  Also, if an investor purchases a life settlement and then the insured lives for many years in the future, that is more premium income for the insurance company that would not have come in if the policy had lapsed.

So, for those many Americans who own life insurance, education is the key to making a rational economic decision.  In many cases, selling a policy makes the most sense.  To learn more about options available to consumers who no longer need or can afford their life insurance policies, visit the “Life Policy Owners” section of the LISA website.

About the Author:

Dan Young, CLU, ChFC, CASL, is the President of Magna Life Settlements, Inc., a well-established life settlement provider focused on maintaining transparency, risk management and rigorous process control in the purchase of life settlements. Magna is owned by Vida Capital, a vertically integrated asset management company providing longevity contingent investment solutions to institutional and individual investors. Dan is the Vice President, Asset Management and General Counsel of Vida. 

In addition to his role at Vida, Mr. Young is an adjunct professor of regulatory law at the University of Texas Law School, Board Member and Chair of the Legal Committee of the Institutional Longevity Markets Association (ILMA), Board Member of the Life Insurance Settlements Association (LISA), and a frequent speaker at life settlement industry conferences. Prior to joining Vida Capital, Mr. Young was the President and CEO of New York Life Insurance Company’s Broker-dealer and Registered Investment Advisor.  Mr. Young graduated from Stanford University with Honors and Distinction and from the University of Chicago Law School with Honors.