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.