What is a Life Settlement Situation?
A Life Settlement is a transaction between a client (policy owner) and a buyer (investment fund, management company, or bank). A life insurance policy may be sold for a cash lump sum if the client either no longer desires the own the plan, cannot or will not pay for the plan, or when expenses make liquidating assets necessary. The buyer will review several factors when deciding the market value of a policy. Deciding factors may include the policy age, the face value or death benefit of the policy, the policy internal, the policy premium, the client’s age, and client health. After review, the buyer chooses to pass or make an offer for the policy. The client has the freedom to accept, decline, or negotiate. If an amount is agreed upon between the two parties, the buyer will take over ownership of the policy, and the client will receive the purchase amount.
Picture this. You have had a life insurance policy for decades. You have funded it from the time your children were born, up through their college, while you were in your prime working years, and into retirement. Now, your children are grown and gone. They have families of their own, and you no longer need life insurance. What are you going to do with the plan? Well, if you are like 98% of America, you cancel it or let it run out on its own. All those decades of premiums paid into the plan are gone. It was a necessary part of your business or family financial plan, but there might not be anything to show for it in the end.
How about another scenario that is increasingly common these days? You, or your client, are older and dealing with ailments from age. Perhaps youthful activities now require a new knee, hip, or shoulder. Diabetes is slowly taking its toll. Perhaps it is more serious like heart disease, cancer, or Alzheimer’s. You might need your life insurance plan at this stage, but what you might need even more is cash to pay for medical bills, assisted care, prescriptions, or housing. The typical choices for most Americans? They redeem all their retirement assets. They sell assets like homes and liquidate everything to qualify for government assistance.
This is not a pleasant scenario, is it? Unfortunately, it happens all too often, and most folks do not have a choice. However, here is where the clouds part and the sun shines down on our gloomy story. What if you could simply sell your life insurance policy on the open market – just like you could sell a car or a home – and receive cash? Instead of letting a policy lapse and losing decades of contribution, you recoup a sizable portion. Rather than sell assets or use retirement funds, there is an option to sell a life insurance plan to pay medical bills.
A life settlement is not something new and not too good to be true. The majority of Americans are unaware of this option.
How does a Life Settlement Work?
Life Settlements are nothing more than a person, business, bank, or investment group offering a sum of money to a policy owner to take ownership of the plan and receive proceeds when that person passes away. That policy owner can choose to accept the offer, negotiate a different one, or decline; it is up to them. Life Settlements are not the viaticals of old. The clients are not being preyed upon or ripped off. Just like a home, a life insurance policy is an asset. Just like a home, you may sell the policy. It can be a term plan, whole life plan, universal life plan, or variable. There is no difference. Unless, in some circumstances, the term plan is no longer eligible for conversion.
What is slightly different from the sale of other assets is the timing involved and the age & health of the seller. Here is where the two scenarios above become more complete stories.
- Life settlement buyers are looking for policies where the owner is 65 or older. This is not a specific rule set in stone but a guideline.
- The less healthy an individual is, the higher the likelihood of a buyer and a higher offer.
- Medical records are reviewed. Life expectancy assumptions are made about the client.
- When a purchase happens, the client ceases paying all premiums, and the buyer takes on that responsibility.
A case study to properly illustrate a life settlement.
Bob Jones is 74 years old, is of average health for his age group, and decides he no longer needs the Guaranteed Universal Life plan that he has paid for the last 30 years. His total contribution over that time has been $90,000 ($250/month for 30 years). The policy has a face amount of $2 million. There is no cash value in the plan. It is guaranteed to last until he is 100 years old. If he were to drop the plan because it is no longer necessary, he is out the entire $90,000. It was critically important that he had the coverage, and he understands that his plan was inexpensive for the coverage. However, after engaging with his insurance agent and investigating the options in the settlement market, Mr. Jones was offered $270,000 in cash for his policy. Rather than cancel the plan outright, Mr. Jones decides to sell his insurance and take a hefty sum instead.
Of course, there can be variance in the time frame of the exchange, the documents and information requested, and the outcome of the offers. Anyone looking to sell should plan to shop around as much as possible. It is usually not advised to go directly to only one buying institution. That buyer is incentivized to offer the lowest amount possible to increase their margin. However, if you have two, three, or 50 buyers all looking at your plan, you are in a stronger position, and the competition often drives up the offers significantly.
Who does a Life Settlement Broker Represent?
In all situations, the broker should represent the client’s best interests.
As with the most sophisticated insurance transactions, a broker must be qualified and licensed to transact this sale on behalf of the client. The life settlement market is still less mainstream, and few agents or advisors are licensed. A brokerage agency is a good outlet for these people and their clients as the agency can facilitate the sale and legally pay the agent. Even more significant is that some brokerage agencies have access to proprietary platforms akin to an auction block. This access allows a client’s plan to be available to most buyers in the country. Again, this increases the offers and the payment to the client.
As local, national, and global markets continue to change, so does the landscape of what is available to clients in the insurance world and what clients expect from their agents or advisors. It is worth noting that there have been cases in recent years where a client has taken legal action against their agent because they were not made aware of settlements as an option. There may even be a precedent set in the coming years where it is required clients be informed about settlements as one of the multitudes of financial options available. It would be wise to get ahead of that wave.
Plan as we might for all the eventualities in life, we cannot always see what lies ahead. Having the option to sell your life insurance plan after its usefulness has waned, or if you are in dire need of money to assist with emergencies, medical bills, and assisted living, is a powerful option indeed. The biggest hurdle is first educating America about life settlements.
EMG is here to help you and your clients with the right Life Settlement plan. You can find out more about Life Settlements by calling us. EMG Insurance Brokerage supplies a wealth of support services for the growth of insurance agents. Contact us today and get the help you need to grow your business.