From the November 2009 issue of Boomer Market Advisor • Subscribe!

Mortality expectations provide real value (Part II)

Last month, I wrote that one way for advisors to provide additional value to their retired baby boomer clients is to seek ways of using mortality expectations to their advantage. This month, I will provide two additional examples of how this might be done.

The first idea is often overlooked, but is an option for a number of older boomers: life settlements. Life settlements are the sale of a life insurance policy that is no longer needed to a third party. It makes sense when the market value of the policy, based on the death benefit and mortality expectations of the insured, exceeds the cash value. But I want to be specific about what I am suggesting. I am strongly opposed to stranger-owned life insurance, in which an investor initiates the idea of the purchase of a life insurance policy and often lends the buyer the money to buy the coverage. That type of transaction is improper, to say the least.

But there is a role for another type of life settlement in which a client bought life insurance a number of years ago to fill a real need, and that need has now ended. It could be key-man insurance for someone who has now retired and is no longer a key person in the former company. Or it could be life insurance to protect against the loss of income from work in the case of premature death and the person has now retired.

In some cases older people have policies with high premiums, but have little need for life insurance protection and need income now. In the ideal case, the policy will have a high face amount but relatively low cash value. Dana Peterson of Life Values Advisors informed me of two cases in which life settlements were excellent solutions. The first was a 74-year-old woman in good health with a universal life policy that had a death benefit of $1 million, but very little cash value. The annual premiums were $33,000 a year, which she had trouble affording. She did a life settlement and got $180,000 for the policy, which she split among her children. She was able to enjoy the provision of the gift, rather than having to sacrifice in order to maintain the life insurance.

The second example was a 73-year-old man who retired with a key-man policy with a $2.5 million death benefit. The policy had no cash surrender value. Instead of allowing for the policy to lapse, it was settled for $370,000. To get a life settlement, a person has to provide information about their health, such as an attending physician's statement. People in poor health will get more, but a life settlement can make sense for some people in good health as well.

The second example I would like to bring forward is a first-to-die life insurance policy that has an accelerated benefit that pays for long term care costs. Among older couples, the survivor often has expenses that strain financial security. There are end-of-life expenses related to health problems that can be quite high. After death, their Social Security payments decrease and the services often provided by the deceased spouse, such as minor home repairs, have to be purchased. Typically, the wife inherits these problems because female life expectancy is higher than male life expectancy. But, one cannot predict who will die first, so a first-to-die policy makes sense. And the accelerated benefits to pay for long term care provides extra protection.

A major challenge over the next several years will be to squeeze more from the assets baby boomer clients have accumulated. Seeking out the efficiency of mortality-based products provides advisors with another helpful tool to protect the financial security of your clients.

Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.

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