This is an unusual time for seniors in retirement. Markets have delivered solid returns for several years, but low fixed-income yields and rising inflation have some policyholders wary. Retired policyholders are questioning whether their assets can provide enough cash for their lifestyles. Using life settlements as an inflation hedge may be what they need.
Understanding a Life Settlement Transaction
A life settlement is essentially the sale of a life insurance policy to a third party, usually an insurance broker or an investor. A life settlement is the sale of a life insurance policy above the cash value and below the death benefit value – it’s the sweet spot in between.
Policyholders who sell their life insurance policies can stop the cash flow needed for future insurance premiums and get their hands on the cash from the sale of the policy.
Of course, selling a life insurance policy means beneficiaries will no longer receive the death benefits. However, it might be the best option for many seniors, especially those with policies they can no longer afford. Unfortunately, we see many clients who don’t know this is even an option. With a few exceptions, many insurance carriers don’t inform policyholders of the life settlement option because they benefit from lapses in these policies.
Today’s Inflation Scene
As of April of 2022, the annual inflation rate for the United States was 8.3%. That’s almost double compared to the 4.16% rate last year. It’s not surprising that many of our clients are concerned about rising costs and market instability.
For senior policyholders over 70, this might not be too much of a concern. However, we do have policyholders in their 50s. In this case, with inflation averaging at 3.8% per year, their policy could be worth 30% to 40% less in 10 years.
In both scenarios, clients need to think ahead to find the solution that best adapts to their needs.
How to Use a Life Settlement as an Inflation Hedge
Today’s advisors and agents need to factor in inflation. Clients need different solutions to prepare themselves and have the tools to fend against inflation or any other market shifts that might occur in the future.
Life settlements are an excellent choice for anyone considering alternative investments. These plans offer solid returns while operating as bond-like investments. There are a few reasons people would sell their life insurance policy: they no longer need insurance, cannot cover the premium, or need cash.
A life settlement can help policyholders capture a portion of benefits they would otherwise forfeit. Some are eligible to do this. They’ll have to own a policy with face amounts over $100,000.
How It Works
To better illustrate this point to clients, we always create a hypothetical scenario. In this case, consider a 50 years-old person who has a $1 million universal life policy. Twenty years later, they no longer need the protection, have underlying health issues and need cash to keep rising living costs. They can:
- Let the policy lapse and take the cash value
- If the policy is suitable, sell it through a life settlement transaction for more than the cash value
We always recommend that advisors and clients explore option B. In this case, the investor purchases the policy and pays premiums while the policyholder is alive. The buyer receives the death benefits. And the return will be the million-dollar benefit, less the purchase price and premiums paid.
In addition, we recommend that clients worried about inflation or how to maintain their lifestyle long-term have their life insurance policies appraised.
Policyholders need to work alongside an advisor to complete this transaction. Life settlement brokers can help them find a buyer. Many life settlement investors will buy policies directly from policyholders, but having the backup and support of brokers can help ensure that the policy is sold at the best price.
Tips for Selling a Policy
Before selling a policy, we always recommend that our clients sit down with an advisor to see whether it makes sense. During this session, we ask questions like:
- To what extent do the beneficiaries need the death benefit from the policy?
- Can you still afford the policy’s premium payments?
- Is there cash value that can be used to make premium payments?
- If premiums are not affordable, are any beneficiaries interested in paying the premiums to keep the death benefits?
In addition, we’ll review how much the policy is worth. This is used to determine what a buyer might be willing to pay for a policy. If the amount makes sense to sustain our client’s long-term cash needs, we consider a life settlement transaction.
When Is Selling a Life Settlement the Right Option
Of course, life settlement transactions are very complex. A life settlement can serve as an inflation hedge by improving cash flow and eliminating future premium payments. However, selling the policy also means beneficiaries won’t receive the death benefits.
As many senior policyholders retire, they’re faced with the harsh reality of keeping up with rising costs. The awareness of life settlements has increased over the past years, and many of our clients have sold their policies. This isn’t a decision that should be taken lightly. However, we must let our clients know about the option of a life settlement transaction to fight inflation.
While time will tell if inflation will continue to trend upward, today’s seniors are looking for answers, and a life settlement might be the solution for your clients. Start with a policy appraisal, understand their cash flow needs, and explore different alternatives to see whether a life settlement is the right option for them today.