Breathing new life into old Life Insurance policies
After years of paying life insurance premiums, many seniors are realizing that their policies are no longer meeting their current needs. Unfortunately, few life insurance companies offer fair or financially attractive alternatives.
For people wishing to divest themselves of their life insurance policies, historically, there have been only two options: 1) Stop paying the premiums on the policy at which point it will lapse and be cancelled. Over 85% of all life insurance policies lapse without any death benefit being paid! 2) “Surrender” your policy back to the life insurance company for a predetermined value called the policy’s cash surrender value, which typically represents only a fractional amount of the policy’s face value if any.
Neither of these alternatives represents fair value to the policyholder and begs the question “Is there a better way?” Yes, it’s called a life settlement.
What is a life settlement?
A life settlement is the sale of an existing life insurance policy for more than its cash surrender value, but less that its net payout upon death. It treats a life insurance policy like an asset, similar to a house or automobile, which can be sold to a third party. Depending on the size of the policy’s face amount and the age and health of the insured, the proceeds from selling a policy can yield several times the policy’s cash surrender value. The policyholder would receive a lump sum payment and is free to use the funds as he or she sees fit.
Who is eligible to consider a life settlement?
Although anyone with an in-force life insurance policy is eligible for a life settlement, the typical policyholder is 65 years of age or older and has a life expectancy of between four to 15 years. Businesses that hold life insurance policies on executives are also eligible for a life settlement.
When to consider a life settlement?
Seniors or businesses in the following situations may want to reconsider the value and necessity of their current life insurance policies:
• To fund a more appropriate replacement insurance policy
• To eliminate burdensome premium payments
• The beneficiaries have predeceased the insured and the policy is no longer needed
• A re-allocation or liquidation of assets is required (e.g. divorce)
• More attractive investment opportunities are available
• Cash flow is needed to fund healthcare or financial requirements
• Desire to make charitable contributions
Professional or Business Reasons:
• CEO or Partner retires and the business is sold
• Liquidation or reorganization of the business assets
• “Key man” policy no longer required
Estate Planning Reasons:
• Proceeds of policy can be better used for a variety of other financial planning purposes
• To create liquidity within a trust for other cash flow needs
Whatever the reasons motivating someone to sell his or her life insurance policy, it is important to note that the proceeds from the policy sale are always greater than the cash surrender value that would otherwise be offered by the life insurance company.
• Should you use a broker or a provider? You can use either to engage in a life settlement, however most settlements are conducted through a broker who can solicit multiple, competitive bids on the insured’s behalf. Working with a provider however eliminates any intermediaries in the process.
• What is the reputation of the settlement broker/provider, how many years experience do they have in the industry and what is their past performance with settlements?
• Does the broker/provider belong to LISA (Life Settlements Association of America), the industry trade association?
• What are the tax implications of selling my life insurance policy?
• Does your province currently allow life settlements to be transacted? While life settlements can be conducted throughout Europe and the United States., life settlements can only be transacted within 3 Canadian provinces thus restricting Canadian residents and seniors from taking advantage of this secondary and fair market opportunity.
When considering the sale of a life insurance policy, it is important to consult your financial advisor, estate planner or lawyer. He or she will help you to understand the life settlement process and advise you on the most appropriate course of action.
The life settlements industry is growing fast. A June 2005 report by Bernstein Research estimates that the market will grow to US$161 billion by 2030 in the U.S. alone. Since the report was written, many analysts predict even more explosive growth. As a result, the industry is highly competitive, attracting large and reputable institutional buyers who bring credibility, stability and consumer protection with respect to privacy and confidentiality.
Life insurance policies have historically been viewed as a benefit only to be awarded upon death, and therefore, had no present value. With the introduction of life settlements, seniors and businesses previously handcuffed by life insurance companies are now able to breathe new life into old policies, allowing them to maximize their value today.
Leonard H. Goodman is Chairman and CEO of First Equity Benefits of America, Inc.