The current controversy over the life settlement business seems to result more from political grandstanding for “face time” in the media than from politicians’ real concerns about elderly citizens selling their life insurance policies at unfair prices.
The controversy tends to obscure other issues that should be of great interest to seniors.
The coming flood of retiring baby boomers has everyone from Capitol Hill to Podunk concerned about how boomers will cope with the financial burdens of extended longevity, inflation and projected instability in the Social Security system.
According to some surveys, large numbers of the soon-to-be-retired are confident they will have enough funds to last their entire lives. Unfortunately, closer questioning often reveals that this attitude is merely “unwarranted exuberance,” similar to the lack of understanding of the dotcom bubble of the late 1990s.
We have written in the past about the seeming reluctance of retirees to consider life contingency annuities as a hedge against outliving retirement funds, and about the reluctance to purchase annuities at time of retirement due to fear of losing liquidity that may be needed in the future.
Although the time of retirement may be too late to purchase life insurance, it is certainly a good time to decide whether to keep any life insurance already owned or to convert some of it to another form that may be more tax effective for liquidity needs.
Here are some factors to consider:
o Cash value life insurance still offers the unique feature of enabling death proceeds to be paid to beneficiaries free from income taxes.
o Certain types of cash value life insurance enable policy owners to borrow against their policies on a tax-free basis. This characteristic can offer retirees what is perhaps the perfect liquidity feature for protecting against unforeseen emergencies or other needs for cash that were not planned as part of the retirement process.
There is no quarrel that, in general, people who are “insurance poor” may be better served by selling all or some of their policies than by surrendering the policies or letting them lapse. We have participated in advising clients for whom the life settlement process was a godsend, providing essential funds when the clients would have experienced severe financial hardships had they not been able to sell their policies for substantially more than the cash values.
Nevertheless, “one size fits all” is one of the worst strategies to use. That is, while a life settlement may in some circumstances be helpful, continuing to own policies with cash values and borrowing against them may be a better liquidity plan than would be an outright sale as part of a life settlement.
o Purchase of periodic premium whole life insurance policies at the earliest possible age is still one of the best hedges against unforeseen future needs than is the case with any other financial product.
This may be true even for those who are relatively close to retirement. People with the bulk of retirement assets held in qualified retirement plans may, if they roll them over into Individual Retirement Accounts or to Individual Retirement Annuities, find the lack of liquidity to be too restrictive. For this reason, we regularly advise consideration of allocating a portion of pre- and post-retirement income to the purchase of cash value life insurance.
The old mantra that cash value life insurance provides protection if you die, if you retire or if you are disabled is more valid today than it has ever been.
Unfortunately, most people in today’s financial services business have never been exposed to the magic of “capital needs analysis” or to the concept of “insuring human life values.”
These concepts are fundamental to the life insurance business, and they are particularly important to those approaching retirement age–or even to those already retired. The magic of tax-free borrowing from cash value life policies provides a protection against any eventuality that is unique and of particular value to the average person.
Those fortunate enough to be among the world’s richest people may not need to worry about how much capital they’ll need for the remainder of their lives; they may not need to worry about how big a bite taxes may take from their investment income that they had planned to use for retirement. But most people have such worries. Tax-free borrowing from cash value life policies can protect against unforeseen financial needs, regardless of what they may be.
While life settlements provide a valuable tool, owners of cash value life policies should certainly give careful consideration to borrowing before they take the irreversible step of selling their policies in the life settlement process.