By Steven Arenson and Robert G. Miller
Today, when you and your 65-plus-year-old client determine that the need for an in-force life insurance policy has changed or no longer exists, you have a dual opportunity: You can serve your clients best interests and provide yourself with new sales opportunities at the same time.
Depending on your clients circumstances, needs and goals, the most appropriate solution may be one of the following: make a cash- or partial-surrender of the policy; exercise nonforfeiture provisions; gift the policy; implement a 1035 exchange or annuity transfer; or arrange a life settlement.
When evaluating the best way to divest the policy, the life settlement approach should be considered. In fact, we believe you may have a duty, as the clients advisor, to consider it.
A life settlement is the sale of a life insurance policy by the policy owner to a third party. Using a proprietary formula, the third party or “provider” discounts the death benefit and makes a cash offer to the policy owner or “settler.”
Once the offer is accepted, the provider becomes the policy owner, beneficiary and premium payer, and receives the entire death benefit upon maturity. The settler has immediate and unrestricted use of the sale proceeds and the right to rescind the sale within a specified period of time.
Clients insurance needs are rarely static. Riders are added and canceled; face amounts and premiums can fluctuate over time; policies are replaced when appropriate; and due to a myriad of changing estate, business or personal reasons, policy surrender or lapse is an everyday industry occurrence.
Unfortunately, when surrendering and lapsing a life policy, many policy owners do not receive the policys fair market value. This is because the life settlement option was not explored.
Investors are persistent in discovering new ways to locate and extract previously undetected value in commonly held assets, and a vibrant secondary market for certain life insurance polices has evolved over the past five years.
In some cases, fair market value for an unwanted policy may not be what the issuing company says it is, but something much greater, as calculated by a provider.
Since many policies may not qualify for an offer or an offer that is better than the policys cash surrender value, insurance professionals should consider the following guidelines when assessing whether to pursue a life settlement option.
In most instances, the insured should be 65 years old or older, and the policy must be beyond the contestable period.
Importantly, the insured must have experienced a decline in health since the policy was issued. The greater the decline in health, the higher the probability for an offer, and the larger the settlement price.
Although all individual policy types can be underwritten for a life settlement, policies with flexible premiums and low cash value tend to be better prospects than policies with fixed premiums, and substantial cash value or loans.
Insurance professionals have an inherent prospect base for life settlements. This is their existing book of business.
Whenever a lapse or surrender notice arrives on a policy fitting the above description, the producer and client should explore the life settlement option.
An automatic premium loan or past due premium notice also may be a precursor to changing insurance needs and should be investigated.
Periodic insurance reviews with clients are fertile ground for uncovering life settlement opportunities, too. This is because reviews often reveal changing client needs warranting a subsequent change to the clients insurance portfolio.
In weighing the relative merits of this option, remember that your clients received expert advice when they purchased the policy from you. They expect no less when the policy becomes obsolete.
A life settlement can be the means to a clients financial planning end, delivering the highest economic value and the best solution for changing needs.
Robert G. Miller, CLU, ChFC, RHU and CFP, provides consulting for the financial services and life settlement industries out of his Chicago office. His e-mail address is firstname.lastname@example.org. Steven Arenson is principal of Arenson Consulting Inc., a Chicago firm providing marketing and distribution solutions. His e-mail is email@example.com.
Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.