A popular narrative in mainstream news media coverage is that the lack of planning for individuals approaching retirement is pointing the way to a serious national problem. Health care and other costs are on the rise and a great many seniors are in a state of uncertainty about their finances. For many, a state of panic sets in when they realize their resources may not be enough to pay for the comfortable retirement years they once envisioned.
As one of the most overlooked assets in an individual’s investment portfolio, a life insurance policy is often not utilized to its full potential. Why? My experience over the past few decades in this business has shown me that it’s because individuals are unaware this asset creates liquidity options for them and, unfortunately, their professional advisors don’t understand all alternative uses for a life insurance policy. Many advisors, acting out of the best intentions, simply advise their clients to lapse or surrender the policy, roll it into a paid-up policy, or reduce the death benefit to save premiums.
But what about a life settlement?
Many seniors — and many of their financial and legal advisors, too — are not aware that a life insurance policy is personal property and may be sold as a life settlement for a value substantially greater than its cash surrender value. As a result, billions of dollars (face value) of policies that are no longer needed, wanted or affordable are lapsed and surrendered back to life insurance carriers by seniors who might have sold them for a cash payment. According to a Government Accountability Office (GAO) study on life settlements, the amount policyholders who settled their policies received was up to seven times that of the lapse or surrender value. That represents hundreds of millions of dollars of value given back to insurance carriers.
Studies show that nearly 80 percent of baby boomers and seniors are interested in life settlements as a means to supplement retirement finances.
So, let’s talk about a senior’s right to know about their options with life insurance policies. Specifically, I believe they ought to have a right to know that there are options they should consider before lapsing their policy. Six states — Kentucky, Maine, New Hampshire, Oregon, Washington and Wisconsin — have already passed various versions of a life insurance disclosure requirement, requiring insurance carriers to notify seniors in certain circumstances of the alternatives to lapse or surrender of their policy. These alternatives may include options such as the following:
- Accelerated death benefit or available riders
- Assignment of policy as a gift
- Life settlement
- Policy replacement
- Maintenance pursuant to terms or riders
- Maintenance of policy through a loan
- Conversion from term to permanent policy
- Conversion to long-term care insurance or a long-term care benefit plan
A reasonable question may be: Who has this obligation to inform? In short, I believe that we all do. All of us who, in some capacity, are serving as financial advisors to seniors need to be informed and educated ourselves about the options available for policies that may be used as a financial resource. Producers who perform annual audits of their life clients should consider these options in their reviews. Financial planners and other advisors need to be informed and educated about the options available that best fits the needs of their clients. This is not about selling! It is about educating and informing and knowing where to find the necessary resources to evaluate one’s options.
Life insurance companies should also join in the effort to inform and educate policyholders of their rights and options for the policies they sold to these consumers in the first place. An ongoing case in California, Larry Grill, et al. v. Lincoln National Life Insurance Company, illustrates an example of the potential liability for a life carrier who did not inform the policyholder of all the options available for a policy that was no longer affordable. While the outcome of the case is pending, the primary message is that a policyholder who buys a life insurance policy should be informed by that carrier about the options available to them if there comes a time when the policy is no longer needed, wanted or affordable.
It is understandable why insurance carriers are concerned about the impact of lapse rates on their profitability, but I believe they have a moral obligation to do what is in the best interest of those who invest significant amounts of their life’s resources in their life insurance products. Seniors do have a right to know; it is our collective obligation to inform and educate them about the potential value available to them and the alternatives to lapsing a policy.