After a few tumultuous years, the life insurance settlement industry is incredibly healthy, as many well-respected life settlement companies have taken leadership roles within the marketplace, and the business of purchasing unused or unneeded life insurance matures for the better. Strong institutional players with defined goals predominate, and the target markets for purchasing policies has become more clear and refined. Today represents an excellent time for advisors and consumers to consider life settlements.
The overall market for life settlements remains strong as more and more baby boomers approach retirement age – approximately 3.6 million boomers reach age 65 each year and the number will continue for the foreseeable future. Unfortunately, a huge portion of baby boomers are delaying retirement and many believe they have not saved enough. Some believe they will never be able to retire. Many of these same individuals have life insurance policies and will unknowingly allow them to lapse – without knowledge that unneeded or unwanted policies can be sold for immediate cash as life settlements.
The health of the life settlement market, the demographics of policyholders and the need for funds to pay for retirement have and will continue to generate ongoing opportunities for advisors with clients who qualify for life settlements. The core reasons for selling a policy remain.
Insurance no longer needed. As life situations evolve, so does the need for coverage and sometimes it is simply no longer needed. Perhaps a spouse passes away or there's a divorce. Coverage purchased as part of an estate plan is no longer needed or children become independent – and insurance purchased to protect them is no longer required.
Premiums increasing and coverage too expensive. With the exception of term coverage, the cost of life insurance typically increases over time. In some cases, affording this coverage becomes untenable. The “cost vs. benefit” equation has changed over the years, and now having the coverage makes less sense.
Insurance purchased for business purposes may not be needed anymore. Key man policies may have been purchased by companies for employees who no longer work there. Or policies intended to fund buy/sell agreements are no longer necessary.
For advisors, this leads to many opportunities. First, they can be a hero if they explain life settlements and present the "found money" proposition of the transaction to their clients. If a client was planning on allowing a policy to lapse and the agent brings the life settlement solution to the client, then it is incredibly beneficial for both parties. Clients get an unexpected payout, and the advisor earns unprecedented goodwill.
In addition, offering life settlements can bring new opportunities. Clients who sell a policy will likely need to invest the proceeds, and they may want to purchase a more attractive policy or annuity. Another instance where both parties win.
What size and types of policies qualify? For those interested in selling a policy, a life settlement company is typically looking for whole or universal life insurance policy in excess of $250,000 in face value. In some cases, term policies can be converted to whole life and then sold as “term-to-perm” transactions. No maximum size exists but some companies prefer to buy smaller policies while some focus on multi-million dollar policies.
Who can sell a life insurance policy for cash? In most cases, life settlement companies are seeking clients who are older than age 65 as computing a life settlement value hinges on life expectancy. Older individuals are more likely to qualify. Exceptions might be available for individuals in failing health with an immediate need.
Who buys the policy? Policies are ultimately purchased by a life settlement provider but many entities exist that offer educational materials and background information so that individuals can make an informed decision.
Smaller face value policies growing in popularity. For many years, life settlement companies typically wanted the largest possible policies. Today, small face value policies that are below $1 million are in high demand.
Strong market for terminally ill policyholders with life expectances less than two years. The life settlement industry began more than two decades ago helping terminally ill individuals, and today the market is growing for policies representing patients with a life expectancy of two years or less.
Retained Death Benefits enable a policyholder to sell part and keep part. For those wishing to keep some of their insurance coverage, they can use a new option called Retained Death Benefits in which they sell part of a policy as a life settlement and keep a portion of the death benefit for their beneficiaries. Policies in excess of $1 million are typically eligible.
Express/simplified medical underwriting speeds up the process. For policies with a face value of $500,000 or less, new simplified underwriting can shave-off weeks of time from the traditional process of gathering medical records and life expectancy evaluations. Using a questionnaire, telephone interview, a prescription drug history report and other data, a life settlement can be underwritten much more quickly – in some cases.
“Life Loans” offer a new way to get funds now. With a “Life Loan,” a policyholder keeps the insurance policy and the beneficiaries remain in place. Typically an option for individuals with a short life expectancy of two years or less, an individual can receive a loan of up to 50% of the policy’s death benefit before their demise. The minimum policy size is $75,000, and in most cases, the insured must have a serious medical condition that results in a short life expectancy.
The marketing of life settlements has become more sophisticated, and the speed at which the transactions can be completed has improved as has the overall customer experience. Companies like the Golden Opportunity Network provide detailed information on life settlements and guidance on how one qualifies as well as the best ways to sell a policy.