Seniors are now able to add a new concept to their financial review as they move into the golden years. Life settlements have become a viable product for seniors who have life insurance policies that they think are no longer needed, or policies on which they can no longer pay the premiums due to cash flow problems. Life insurance policies were declared to be property by the United States Supreme Court in 1911 in the case of Grisby v. Russell. Since a life policy is property, it may be transferred to a life settlement provider for cash. In order to be property, the policy must contain specific rights such as the ability to borrow against it, name a beneficiary, change a beneficiary, assign the policy, and be sold.
If the policy meets criteria, the National Association of Insurance Commissioners (NAIC) guidelines allow life settlement companies to purchase policies in a regulated business situation, which will insure that a fraudulent transaction should not occur. When these regulations were published, well-funded corporations entered the life settlement market. The reason policyholders will consider a life settlement, rather than lapsing the policy by removing the cash value, is that the settlement will provide the client with a greater amount of cash. The client is presented with the option of receiving more money by transferring the policy to a life settlement company.
In the past, the ideal prospect for a life settlement has been a senior (age 65-plus) with a large death benefit and no desire to continue the policy, because of changes in their financial situation. If the policy was purchased for business purposes – buy-sell funding, key person, etc. – the need for the death benefit may no longer exist.
The client with personal insurance may have experienced a change in a life situation, college education may be completed, family responsibilities may have changed, or the premiums have become a burden because of reduced income in retirement, a loss in the market, illness, or bankruptcy. The client may need to direct his or her income to more urgent needs – taxes, medical care, or possibly long-term care. The increased cost of living has placed a financial burden on a large number of seniors. If you can secure more money for your clients by using a life settlement, you will have helped them and fulfilled your fiduciary responsibility.
With the entrance of more providers into life settlements, a huge market has opened for the public and agent. The “small” policy can now be transferred in a matter of several weeks and help the financial situation of the client. Providers will accept policies with face amounts of $50,000 to $250,000 and, of course, larger face amounts. In some cases, term insurance may be considered for a life settlement. There are 36 million policyholders over the age of 65 who can now take advantage of a life settlement, if they desire. I believe a policy that pays the tax-free death benefit is more valuable in the long run, but if the policy is going to be lapsed, and the client receives more immediate cash, we have helped them.
If you and the policyholder believe the death benefit is of prime importance and premium payments are creating the problem, you may want to review the possibility of a reverse mortgage to pay the premium and keep the policy in force. The client can review the cost of the reverse mortgage versus the benefit of the tax-free death benefit. The life settlement provider and the reverse mortgage give more options to provide financial protection to a growing number of seniors and their beneficiaries.
Bob Smith, CLTC, is Vice-President of Underwriters Marketing Service, Inc., in Mount Laurel, New Jersey. He began his career in insurance with the Monarch Life Insurance Company in the early ’60s, selling disability income insurance in the Philadelphia area. After several years in personal production, he took a position with the Fireman’s Fund as a field sales representative. Mr. Smith moved to the home office in California, and held positions in the marketing and training department. After relocating to the New Jersey area, he took a position with Underwriters Marketing Service. Mr. Smith has been a CLTC for several years, and has been active in the long-term care sales area for over 20 years. He has also used reverse mortgages for several years to assist seniors in planning for their futures.