Determining the Right Solution
The American financial planning landscape has changed significantly for seniors over the past decade.
Sustained low-interest rates have made it more difficult for your clients to generate income, while more volatility in the equity markets has made them gun-shy about banking on predictable returns from stocks, bonds and other traditional investments. The result is that the psychology of seniors is fragile, even to the point that a 2010 survey found more than three in five (61 percent) said they fear depleting their assets more than they fear dying.
Financial advisors and other professionals who work with seniors have a uniquely important role to play with protecting their clients’ assets.
One of the ways you can fulfill this responsibility is to advise them of specific options to consider if they own a life insurance policy they no longer can afford, no longer need or simply don’t want to keep anymore.
How can you help your clients identify an exit strategy from an unneeded or unwanted life insurance policy? You can advise them to explore:
- Accelerated death benefits. For terminally ill policyholders, an accelerated death benefit enables them to receive cash advances against the death benefit.
- Assignment of the policy as a gift. A policyholder can give away ownership of a life insurance policy by signing an assignment or transfer document and notifying the insurance company of the change. After the policy is transferred, the new owner is responsible for making premium payments.
- Life settlement. Individuals can sell their policies for more than the surrender value but less than the death benefit. A life settlement provider continues to pay the purchased policy premiums, collecting the full amount when the policy seller passes away. The amount received for a life settlement varies depending on the life expectancy of the policyholder at the time of sale, and the ongoing premiums necessary to keep the policy in force.
- Convert life insurance to long-term care coverage. A life insurance conversion program is the sale of a life insurance policy to a third party in exchange for monthly payments made to a long-term care services provider such as an assisted living residence or home care provider.
- Convert from term to permanent insurance. Some term life policies can be converted to permanent insurance, without having to undergo a medical exam or provide health information. This enables an insured to keep coverage that would otherwise lapse at the end of the term. Permanent insurance provides coverage until death.
A good starting point for protecting your senior clients is to simply inform them about the life settlement option as an alternative to lapsing or surrendering a life insurance policy.
Six states — Kentucky, Maine, New Hampshire, Oregon, Washington and Wisconsin — have already passed various versions of a life insurance disclosure requirement, legally mandating that insurance carriers notify seniors in certain circumstances of the alternatives to lapse or surrender of their policy (e.g., accelerated death benefit or available riders, assignment of policy as a gift, life settlement, policy replacement, etc.).
The “Seniors’ Right to Know” movement is growing and may eventually create a duty to inform for financial advisors, which is prompting more pro-active consultation with seniors about their life insurance assets by those advisors who seek to be ahead of the curve.
Interestingly, studies show that nearly 90% of seniors who lapsed or surrendered their policies back to insurance carriers would have considered selling the policy if they were aware that possibility existed.
For many advisors, life settlements may be an important option to consider as a possible supplemental retirement income strategy for seniors. By selling their life insurance policies through the “secondary market” to institutional investors, your clients 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.