Producers regularly call us to determine if they have a potential life settlement  case. Sometimes it can be quite easy for us to tell if they don’t. Unlike baseball, where it  takes three strikes to eliminate a batter, any single one of the red flags can eliminate a  case as a likely prospect. An understanding of these three red flags should help you  prospect more productively. 

1. The Wrong Policy

Universal life and term, that is convertible to universal life, get the most attention from  investors. Guaranteed premium universal life policies on insureds over 70 are especially  attractive, even if the insured is currently in good health. Term policies are frequently  overlooked by producers, even though they often make excellent life settlement  prospects. 

Whole life policies, on the other hand, which build significant cash values, would need to  attract offers that exceed the surrender value and that rarely happens. 

If both insureds are still alive, survivorship policies are not commonly purchased, but it is  possible if both are in very poor health. On the other hand, survivorship policies with only  one insured still living can make excellent settlement prospects.

Small face amounts and policies from poorly rated companies are typically not attractive  to life settlement investors. Usually, face amounts of $500,000 and up are preferred, but  there are exceptions that go down to as low as $100,000. The smaller the face amount,  the shorter the life expectancy must be for settlement buyers to be interested. 

And, of course, policies must be beyond the contestability period. 

2. The Wrong Insured

Generally, prospects should be age 70 and above with some decline in health since the  policy was issued. Typically, the insured will have become uninsurable or highly  rated. The younger the insured, the more significant the health issues must  be. Occasionally policies sell at younger ages, but the insured would have to have very,  very serious and predictable health problems (i.e., ALS, metastasized cancer). 

3. The Wrong Situation

When a possible prospect says, “I’ll sell this policy if I get a good enough offer,” that’s a  statement that screams you do not have a prospect. It means, “Sure go shop this thing,  but I still have use for it, I can afford it and I’m really not planning to get rid of it.” It is like  the neighbor whose home is always on the market, but it never gets sold. 

A life settlement is an alternative to terminating a policy, not to keeping one. Life  settlement investors make their offers targeting double digit returns. Applying that kind of  math means a policy owner will never get a good enough offer to offset the likely value of  the policy to the policy owner unless the policy is about to be lapsed or surrendered. 

So productive life settlement prospecting means looking out for those situations where a  policy is likely to be terminated. There are many reasons a policy may be lapsed or  surrendered, but certain scenarios seem to be the most common for a life settlement. 

• Retirement. People commonly review their financial resources and expenses upon entering retirement. At that time, it is not unusual to find policies that are no longer needed that were bought to replace income upon the death of a wage  earner. Additionally, the cost of such policies, especially if term insurance, may  become unaffordable. These policies can be great candidates for a life  settlement and the proceeds can really make a difference in retirement. With the  aging and retirement of baby boomers, they represent a massive market for  potential life settlements. 
• The policy is no longer affordable due to policy performance. Interest rates were at historic lows for years and as a result many policy owners are now being blindsided by premium requirements that dramatically exceed what they  expected to pay when the policy was bought. In addition, premium increases may  also disturb their estate plans by exceeding their annual gift tax exclusion. 

• Term policies or riders that are about to expire or come to the end of their  current premium guarantee or lose their conversion privilege. Term policies  are the life settlement prospects which are most often neglected. Many advisors  and clients don’t realize that a term policy (including group term), if convertible,  can be sold in a life settlement. Since term policies almost never have cash surrender value, a life settlement can truly provide “found” money.   • Chronic disease or illness. While a chronic health condition would ordinarily be  a time when the death benefit of a life insurance policy would seem most  imminent and most valuable, certain illnesses are long-term in nature and  require very costly medical or custodial care. When all else fails, a life settlement  can provide critically needed funds to help pay for those expenses.   • A decrease in estate tax liability. The Tax Cuts and Jobs Act of 2017 (TCJA) not  only reduced the number of estates subject to federal estate tax to roughly 2,000  annually, but also substantially reduced the estate tax liability for those estates  that remain subject to the estate tax. As a result, some policies purchased to  offset estate taxes are no longer needed for that purpose. While holding on to the  policy might still be a good deal for their heirs, people are usually reluctant to  keep more life insurance than is absolutely necessary.   • Business owners exiting their business through sale, liquidation or  retirement. While operating their companies, business owners usually acquire a  number of life insurance policies for reasons that include buy sell arrangements,  key person, fringe benefit, creditor protection and even pension   policies. Typically, the business was paying for these policies in some manner;  either directly, if the policy had been business owned, or indirectly, using a bonus  or split-dollar arrangement. With the business no longer in the picture, both the  need for the policy and the ability to pay for it may have ended, making a life  settlement worth exploring.   When a red flag comes up in your prospecting, it likely means that you don’t have a case,  however, for a policy that is about to be lapsed or surrendered, a life settlement may offer  significantly greater proceeds than accepting the insurance company’s surrender value,  if any. This additional cash can make a meaningful difference in the lives of your clients.  And who knows – you just might hit a home run!   We are always available to speak with you and help you to determine if your client is a  prospect. If you are not sure, ask, as we always say, “It can’t hurt to try – it can only hurt  not to!”

 

Want to find out more about life settlements? You can access our entire library of  newsletters by clicking https://www.lisettlements.com/newsletters/  Contact us:  Robin S. Weinberger, CLU, ChFC, CLTC   (617) 451-3343  Peter N. Katz, JD, CLU, ChFC, RICP®  (860) 937-2936  Ria J. Johnson, CFP®  (619) 920-4000  Rob Haynie  (954) 599-4433  © 2025 Peter N. Katz. All rights reserved.