As seniors continue to suffer from the economic downturn, more of them are cashing in their life insurance policies in order to pay medical bills and other expenses. Senior policyholders last year sold a total of $11.8 billion worth of life insurance, nearly twice what was sold two years earlier. According to Doug Head, executive director of the industry group Life Insurance Settlement Association, selling a policy maybe an attractive option for seniors who determine they no longer need life insurance coverage.
A life settlements transaction is usually handled through a broker who offers the policy to investment companies. These companies agree to pay an amount which is usually several times what the policyholder would receive if he or she were simply to surrender the policy to the insurance company, Head explained. The investment companies continue to pay the premiums and receive a payout when the policyholder dies. Whether or not to sell a policy on the secondary market, however, requires the advice of an independent financial advisor, who can help determine whether such a sale would be in the best interests of the policyholder.
“If you’re thinking about selling your life insurance mostly because you’re strapped for cash, there may be other ways to tap the value of your policy without losing your coverage,” according to David McDowell, a lawyer and insurance expert. “You may be able to take out a loan against your policy or receive a partial payout through an accelerated death benefit. It’s worth visiting with your life insurance agent and exploring the options before sacrificing your coverage.”
The life settlements business began with the AIDS crisis of the 1980s, when some AIDS patients sold their policies in what were termed “viatical” settlements so that they could use the cash for the expensive medications or treatments that were used to treat the disease. Later, according to Scott Gibson of Lewis and Ellis, an actuarial consulting firm in Richardson, the industry expanded its purview to include seniors. “The best candidates for a life settlement are now people in their 70s or older who have a life insurance policy valued at $500,000 or more that they no longer need, perhaps because their spouses have passed away,” said Gibson.
Earlier this year, the industry faced a cash crunch as investment dollars dried up, but now that investors have returned to the market, offers for policies have improved, said Russel Dorsett, co-managing director of the Select Life Settlement Corp. in Houston. The amount a senior can expect to receive varies based on the policyholder’s age, gender and health, but payouts tend to be just short of 20 percent of the policy’s death benefit, said Dorsett. “That’s still three or four times more than they’d get if they simply surrendered their policies to the insurer.”
Bill Clark, of Clark Financial Group in Frisco, TX, has advised some of his clients to take advantage of a life settlement as part of their retirement and estate planning. “A policy may not be needed anymore,” he said. “The beneficiaries may have become financially independent and aren’t counting on the policy’s proceeds, or the policyholder determines the estate no longer needs life insurance to pay death taxes.”
Because a life settlement sale can be an intricate transaction, prospective sellers should rely on financial advisers who are familiar with the risks and pitfalls of such a sale, said Texas deputy insurance commissioner Ana Smith-Daley. “An independent adviser can help you decide whether selling your policy is in your best interest,” she said. “If it is, the adviser will probably call on a broker to shop around your policy to determine what kind of price it will fetch.”
Susan Voss of the National Association of Insurance Commissioners warns prospective sellers to work only with licensed brokers screened or monitored by state regulators as some seniors have been defrauded or otherwise taken advantage of by unscrupulous brokers and middlemen. Prospective sellers should be aware that a sale will require that their medical records be examined and that the investment companies that purchase the policy may occasional check on them to determine when it is time to collect on the policy, said Smith-Daley.
Furthermore, sellers may pay taxes on the proceeds of the sale and may forfeit their right to Medicaid or other government benefits. For these reasons, prospective sellers need to consult a tax advisor before going ahead with a sale.
Despite these concerns, the industry expects life settlements to top $100 billion over the next 20 years as boomers cash out unneeded life insurance policies to fortify their savings.