Do You Have a Life Insurance Settlement Case? 3 Things to Know.
Issue No. 131, September 12, 2023
Do You Have a Case? 3 Things To Know
For a life settlement case to close, three key elements must invariably exist: the right insured, the right policy and the right situation. The presence of these three crucial elements can’t guarantee a successful case, but, together, makes it definitely worth a try!
#1 – Know the Insured
Generally, prospects should be age 70 and above with some decline in health since the policy was issued. Typically, the insured is now highly rated or uninsurable. The younger the insured, the more significant the health issues must be. Occasionally policies sell at younger ages (less than 65), but the insured would have to have very, very serious and predictable health problems (e.g., ALS or metastasized cancer).
#2 – Know the Policy
Universal life and term, that is convertible to universal life, are the most attractive policies to investors. 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. Survivorship policies with only one insured still living also make excellent settlement prospects. If both insureds are still alive, survivorship policies are not commonly purchased, but it is possible if both are in very poor health.Guaranteed universal life and guaranteed survivorship universal life policies on insureds in their 70’s and above, even if healthy, also make excellent prospects. Generally, 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. Additionally, life settlement buyers prefer policies from well-rated insurance companies.
#3 – Know the Situation
The situation must be that the policy is going to be lapsed or surrendered. A life settlement is an alternative to terminating a policy, not to keeping one. There are many reasons a policy may be lapsed or surrendered,but certain scenarios seem to be the most common for a successful life settlement, so be sure to keep a special look out for them.
- 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 most regularly go unnoticed. 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.
- Retirement. People commonly review their financial resources and expenses upon entering retirement and, at that time, it is quite common 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. Interest rates have been at historic lows which has significantly affected the performance of a large number of policies. Many policy owners are now being blindsided by premium requirements that dramatically exceed what they expected to pay when the policy was issued. Alternatively, an adverse change in the client’s financial condition could also render a policy unaffordable.
- Chronic illness. While chronic illness 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 an estimated 1,800 annually, but also substantially reduces the estate tax liability for those few 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 absolutely necessary.
- Business owners exiting their business through retirement or sale. When a business is sold, a policy bought for a buy sell agreement or estate liquidity may become redundant. In the course of operating their companies, business owners frequently acquire a number of life insurance policies for reasons in addition to buy sell that also become unneeded, unwanted or unaffordable when they exit the business. These include 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, through the use of a bonus or split-dollar arrangement. When the business is no longer in the picture, both the need for the policy and the ability to pay for it may have disappeared.
Describing these three key elements can be a simple and effective way to communicate to accountants and attorneys the type of scenarios that can be life settlement prospects. Sharing this information with those advisors will help uncover life settlement opportunities and establishes you as a life settlement resource.
The sale of an insurance policy can offer significantly greater value than accepting the insurance company’s surrender value, if any, for a policy that is about to be lapsed or surrendered. Knowing your clients, their insurance policies, and their personal and business situations can uncover the three key elements that make it worth a try to see if a life settlement would work. And if it does, the additional cash can make a meaningful difference in the lives of your clients.
As situations come up, please don’t hesitate to give us a call. As we always say,“it can’t hurt to try – it can only hurt not to!”
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
