Agents Find Opportunities In Life Settlements
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.