Dust off that old life insurance policy. This dormant asset may just have significant value over and above what your life insurance carrier is stating.
Life insurance has been an integral part of American society for years, with over $3 trillion in death benefits owned by individuals over the age of 65 alone. But what happens when the original need or circumstance for owning life insurance changes?
It is estimated that over $140 billion of life insurance is lapsed or surrendered back to the carrier every year by those over the age of 65. In fact, over 90% of individual life insurance policies, by face amount, terminate without paying a death benefit (2019 ACLI Fact Book). And what is more shocking is that the majority of individual policies lapse and the policyholder receives nothing.
In simple terms, policy owners pay thousands of dollars for valuable coverage and in many instances walk away from their policy with little to zero dollars! Would you walk away from other assets like your home, stocks, or other financial products without significant value?
Until recently, when your need for life insurance coverage no longer existed and the policy had become obsolete or unaffordable, your only option was to go back to the carrier and take the cash surrender, if there was any.
This is similar to a monopsony which is a market situation where there is only one buyer. Imagine if this existed for other valuables you own – having only one option to sell or surrender your asset back to the original seller. Maybe the sales price would exceed your expectations and then again, maybe not.
Well, times have changed and now your life insurance policy can be appraised in the secondary market for its true value, the amount over and above the carrier’s cash surrender value. I am speaking of the little known but widely accepted option of a life settlement.
Origins of Life Settlements
The life settlement market has actually existed since the early 1990s. Viaticals, as they were once known, served and helped individuals mainly during the HIV/Aids epidemic. Policy owners with shortened life expectancies were able to sell their policies thus enabling them to help with medical expenses and day-to-day living.
Fast forward several years and now the life settlement market exists for seniors who are over the age of 65 and own virtually any type of insurance policy with a death benefit of $100,000 or more. The insured/policy owner can now have his/her policy appraised by institutional investment groups for the policy’s true value – the amount a third party will pay over and above the life insurance carrier’s cash surrender amount. Last year alone the life settlement industry purchased over $4 billion in face value, and that number is steadily increasing year after year.
In 1911 the Supreme Court ruled in Grigsby v. Russell that a life insurance policy is an asset that can be treated like any other asset – it can be bought and sold. And in a life settlement, you are simply transferring ownership from the original owner and beneficiary to a third party institution that has made an offer over and above the insurance carrier’s cash surrender amount.
According to the U.S. Government Accountability Office (GAO) report, a typical senior realizes a life settlement amount that, on average is four to seven times greater than the policy’s cash surrender amount. Simply put, for every $1,000 dollars an insured would have received via surrender, the money they would receive in a life settlement would be $7,000.
The Life Settlement Process
In general, to enter into a life settlement appraisal the insured must be over the age of 65 with some change in health since original policy issue, own virtually any type of insurance coverage that has been in force for a minimum of two years, with a death benefit of $100,000 and higher.
Worth noting, an insured under the age of 65 living with serious or life-threatening health circumstances can also be considered for settlement. Universal life policies and convertible-term policies are preferred in today’s life settlement market. Yes, term policies can be considered for life settlement!
The timeline for this free, non-binding appraisal is typically 4-6 weeks from receipt of an approved and regulated life settlement application by the company you may be working with. Medical records from the past five years are obtained and the organization you are working with must adhere to the Health Insurance Portability and Accounting Act (HIPAA) compliance regulations. A copy of your insurance policy and a policy illustration showing premiums due to age 100 are also obtained for a policy appraisal.
Once this information is obtained there are dozens of financial institutions that may bid for the purchase of your policy. Licensed providers/buyers represent financial institutions, pension funds, or private investment groups. The provider may employ a buy-and-hold strategy or, as is done in a home mortgage scenario, choose to resell your policy to another licensed financial institution at a later date.
The appraisal process is similar to shopping for a home mortgage – you can choose a bank to finance your home purchase or go to a mortgage broker who will shop numerous banks for the best financing rate. A life settlement broker is an option to ensure the highest sales price for your policy.
A broker has a fiduciary obligation to the policy owner to “shop” a client’s policy to multiple buyers, creating a competitive bidding scenario. A bidding scenario between all buyers will ensure the best price paid for the purchase of your policy. This process will ultimately reveal the policy’s true value over and above what the life insurance carrier may pay the seller.
The policy owner may also choose to go directly to a licensed provider but keep in mind that the provider has no fiduciary obligation to the seller. And to be fair to the life insurance carrier, their stated cash surrender value may possibly be the highest value a policy owner will receive should they decide to lapse/surrender a policy they no longer need. A fair appraisal will uncover the settlement option versus carriers’ cash surrender.
A Developing Market in Life Settlements
What remains a challenge in the life settlement space is that over 500,000 policies totaling over $140 billion in death benefit are lapsed or surrendered each year by seniors alone, without exploring the life settlement option. According to The Deal’s 2019 report, the life settlement industry continued its upward growth purchasing just under 3,000 policies totaling $4.4 billion in face value. And in 2019 the average amount paid for the purchase of a policy was 20.28% of the policy death benefit. This payout can be significantly higher or lower based on the age and current health of the insured.
Forty-three states currently regulate life settlements, affording approximately 90% of the US population protection under comprehensive life settlement laws and regulations. In 2010 the National Conference of Insurance Legislators (NCOIL) adopted the Life Insurance Consumer Disclosure Model Act which mandates that insurers provide written notice to policy owners who are facing lapse or surrender of their policies. This notice must state that seniors have options regarding lapse or surrender, one of which is a life settlement.
Transparency is a key part of the life settlement regulation with most states containing comprehensive regulation requiring policyholders to receive substantial consumer disclosure and education with regard to this option. With the senior population in America expected to grow from 60 million currently to over 82 million by 2040 the life settlement option will become increasingly more valuable.
At a time when many policy owners over the age of 65 are struggling to pay bills, medical and living expenses, a life settlement appraisal on a policy that is no longer wanted or affordable may be one of the most important financial decisions an individual can make. You appraise your stocks, real estate and other financial assets so why not your insurance coverage when that coverage may no longer meet your needs. After careful consideration and guidance, a policyholder would be wise to explore this often- overlooked option.
For further information on the life settlement industry, refer to The Life Insurance Settlement Association (LISA) Their mission is to advance the highest standards of practice and professional development for the industry and to educate consumers and advisors about a life settlement as an alternative to lapse or surrender of a life insurance policy.