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September 15, 2004 at 08:00 PM
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The majority of life insurance policyholders let their policies lapse or surrender the policies for a minimal cash value.
The wealth lost as a result of these policy surrenders is significant. The National Association of Insurance Commissioners, Kansas City, Mo., estimates that in 1996, for example, nearly $1.5 trillion in life insurance face amount lapsed or was canceled by policyholders.
Today, the life settlement market is giving financial advisors the means to help policy owners extract the wealth trapped in unneeded life insurance policies.
How can financial advisors use the tool?
First, obviously, advisors have to learn how the market works. Then they have to learn how to bring suitable candidates for life settlements together with reputable settlement providers.
How Life Settlements Work
Life settlements are not viaticals.
Unlike viaticals, life settlements (also known as “senior settlements” or “high-net-worth transactions”) are based on the proposition that some insured individuals no longer want, need or can afford their coverage.
Instead of selling the policy back to the issuing insurance company at less than market value, or allowing the policy to lapse and forfeiting the value, life settlements create another option for maximizing the cash value for the policy owner. Consequently, life settlements quickly have developed into a viable and attractive alternative product. The market opportunity exists primarily because life insurance companies typically pay low surrender values when a policy owner decides to redeem or cash in a policy. The surrender values are usually so low that a qualified life settlement provider company can pay a higher value.
Life settlements differ significantly from viaticals in terms of insured eligibility and also in terms of policy characteristics.
A typical viatical settlement is classified as one where the insured is terminally ill or suffers from a catastrophic condition and has a life expectancy of less than 2 years.
In contrast, the insured involved in a life settlement might be in moderate health or good health, with a life expectancy greater than 2 years.
The face value of policies sold through a life settlement tends to be larger, and the policy must have been issued at least 2 years before the life settlement transaction takes place.
In most cases, the policy owner has no continuing obligations after the sale of the policy. The life settlement provider, or a trustee to whom the policy may be re-transferred, takes care of future premium payments to make sure the policy is kept current and in-force through maturity.
The life settlement provider arranges to monitor the insureds health status on an ongoing basis by periodically contacting someone designated by the insured for this purpose. Usually, these contacts take place about once every 3 months, depending on the life expectancy of the insured. This process is explained in detail in disclosures given to the insured at the time of the life settlement transaction.
Opportunity For Agents
For many clients, financial and estate planning needs and the role played by life insurance in financial planning change over time.
