Agents Find Opportunities In Life Settlements

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The debate continues as to whether life settlements are suitable for seniors who have experienced a decline in health.

Critics believe that when these policyholders have a need for cash a life insurance policy should be the very last asset to be liquidated. On the other hand, producers who have advised clients on settlements view them as an additional service they are providing.

“It doesnt fit all over,” says Sidney Friedman, president of Corporate Financial Services, Philadelphia, Pa. “Its for people who absolutely, positively dont need the life insurance they have for one reason or another.”

A life settlement, which is often referred to as a senior settlement, is for someone over age 65 who has between a 25-month and 12-year life expectancy, according to Jeffery R. Levine, managing partner of Financial Options Group, LLC., Farmington Hills, Mich.

“The ideal candidate has some form of change in health since the policy was issued,” he says.

Situations where a life settlement should be considered as an option include those policies that may have been purchased for buy-sell purposes that are no longer necessary or key person coverage where the key employee has either retired or left the company, says Levine.

“Situations change, and thats what creates another option for an individual–and thats what a life or senior settlement is, another option,” he says.

Friedman has worked with a number of people who have come to him looking to exchange their life insurance policies for cash. But Friedman notes that only those policies that meet his approval will be settled, and thats a very small percentage. “Most of the people we talk to, we dont entertain their wish,” he says.

Friedman says he turns away many cases because he doesnt agree with his clients primary reason for settling the policy.

“There are those situations where there is a need for what we are doing, but you have to be very careful,” Friedman says.

But some feel that selling a life insurance policy is the last thing an individual should do. “This is an asset that a sophisticated investor wants to buy. They are expecting a high return on it and are incurring very high costs,” explains John Skar, senior vice president and chief actuary with Mass Mutual, Springfield, Mass.

Some of the costs life settlement companies incur include commissions to agents, marketing expenses, underwriting costs, administration, and even taxes, according to Skar.

“After all these costs they expect to make a high return on acquiring that asset. You [the policyholder] dont have any of those costs if you retain the asset, so why would you sell it?” he says.

The only situation where Skar sees a settlement as a viable option is for “someone who doesnt care about passing on estate assets to anyone, or any charity.” Otherwise, he says, if someone has a need for cash he should liquidate any other asset first.

“This is the asset you want to hang on to because it has a higher expected return than any other asset you own,” he says.

However, in planning situations, Levine explains, people may have purchased these policies several years earlier and their plans changed over time.

“Advisors who are doing annual reviews have found changes in clients situations and are advising them of their options,” he says.

A life settlement is merely one of many options available to clients who find themselves in a situation where the need for life insurance has “evaporated,” he says. “We have them look at reducing the death benefit, or taking loans and partial withdrawals on their policy first while theyre maintaining coverage,” he says.

Furthermore, if a client has had a significant decline in health, Levine advises them to go to the insurer first to see what options may be available through accelerating the death benefit.

Levine tells his clients “if you need the policy, you should find a way to keep it in force.”

He says that life settlements are for “people who truly no longer have the need or can no longer afford the policy, or have had changes in their estate planning.”

“You really have to look at what was the need for the insurance and why it was bought,” explains Lawrence Halperin, president of Halperin & Co., in Warwick, R.I.

Halperin recently worked on a settlement case with an estate planning attorney. The individual was very wealthy and owned several corporate and personally owned policies. Due to the huge liquidity his estate had, the insurance had “become more of a bonus than a necessity,” he says.

“And paying the premiums with a split-dollar agreement became more problematic than anything else,” Halperin says. “So they turned around and sold the policies and the company got about $250,000 in cash deposited into their corporate accounts.”

In this particular case, since the estate planning was thorough and the need for insurance no longer existed, Halperin says he did not see anything wrong with the transaction.

A recent case that Levine saw involved a young man who had purchased a survivorship policy on his parents. His parents owned a farm, and he intended to use the death benefit from the policy to buy out his parents at their death. Over the years, he explained, the young man bought his parents farm. The farming business has been a difficult one and the young man found himself in a cash crunch. He could not afford to continue paying the premiums, so he was ready to surrender the policy.

“He was going to cash the policy in for $42,000, a life settlement company offered him $56,000–which is 35% more than what he was going to get for surrendering it,” says Levine.

While every situation is different, one area that Friedman feels settlements can be valuable is when dealing with bankrupt companies. One case Friedman currently is entertaining involves a bankrupt business owner, age 78, with $1.4 million in life insurance. “Hes terribly hurting; he really needs the money,” he says.

Friedman feels that agents in the insurance business need to start considering life settlements as an option for clients who have life insurance policies that are no longer needed.

“Every situation is different,” he says. “I think the opportunity is growing, agents should be on the lookout to provide this service to clients because there are legitimate situations where a policy should be life settled.”

Furthermore, Friedman feels that by offering such options, it separates your services from other planners. “It puts you up a notch or two in your clients eyes; you are now handling another financial service for them,” Friedman explains.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 26, 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.