How living past age 100 has become a problem for some insureds

100 years old and your life insuranceA recent article in the Wall Street Journal was entitled: “Happy 100th Birthday!  There Goes Your Life Insurance.”  The article discussed how some universal life policies do not pay a death benefit if the insured lives past his or her 100th birthday:

“It is a standard feature of permanent life insurance, a product combining a tax-deferred savings component with a tax-free death-benefit. The provision calls for the termination of the death benefit and payout of all of the built-up savings when the policyholder reaches the specified age.”

With more people living past 100, this has become a problem for some insureds.  The article discusses one insured who has paid more than $1.5 million in premiums into a policy that will not pay a death benefit.

One option for seniors who fear that they are approaching an age where a policy will cease to pay a death benefit is a life settlement.  The senior can sell this policy and receive a cash payout, thereby monetizing the asset.  In addition to cash, the senior no long is required to pay costly premiums, and, in a case like the one we have been discussing, the senior no longer runs the risk that the policy will not pay a death benefit if he or she lives past age 100.

Investors are better able to take the risk of an insured living past 100 due to the nature of portfolio investing.  If there is a 5% chance that a senior will live past age 100, and an investor purchases 100 such policies, one would expect that 5 out of 100 of those insureds will live past age 100.  Conversely, 95 of the insureds will not, so the blend of the portfolio will allow for a profit as 95% of the death benefit will be collected.

Contrast that with the binary outcome presented to an individual.  There are only two options – 100% of the death benefit collected or 0%.  If the insured lives past age 100, it is a total loss as no benefit is collected.  So selling a policy to an investor with a larger portfolio creates a risk profile that is far better than that of an individual.

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About the Author

Mr. Young is a Senior Managing Director & General Counsel at Vida Capital. In addition to his role at Vida, Mr. Young is an adjunct professor of Regulatory Law at the University of Texas Law School, Chairman of the Board of the Institutional Longevity Markets Association (ILMA), Board Member of the Life Insurance Settlements Association (LISA), a monthly blogger, and a frequent speaker at life settlement industry conferences.

Prior to joining Vida Capital, Mr. Young was President & CEO of NFP Securities as well as New York Life’s Broker-dealer network and New York Life’s Registered Investment Adviser. He began his career as a clerk on the Third Circuit Court of Appeals before practicing at Cravath, Swaine & Moore in New York. Mr. Young holds multiple securities licenses (Series 7, 24 and 63) and insurance designations including Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and Chartered Advisor for Senior Living (CASL).

Mr. Young currently serves on the Board of Directors for the Austin Habitat for Humanity. He graduated from Stanford University with Honors and Distinction in 1989 and from the University of Chicago Law School with Honors in 1992.