For your clients in their 70s with maturing convertible term policies, time is running out to exchange these policies, and a life settlement might just be the best available option.
Life insurance settlements offer the opportunity to help clients evaluate the dwindling asset value of convertible term life insurance policies nearing expiration. In the right situation, a policyholder can cash in by first converting to a whole or universal life policy, then selling the permanent policy to a life settlement provider.
In such a case, the term policyholder avoids the higher premium costs associated with most convertible policies and receives cash proportionate to the value of the new asset.
Life settlement funding companies, recognizing this trend in the market, are now offering annual valuation programs to help with the decision-making process. Illustrations and projections, provided free of charge, help determine the viability of a conversion, costs and ultimately what a life settlement payout may look like. The tools are in place for agents to make easy, annual evaluations of policies for possible “term-to-perm-to-life-settlement” transactions.
Here’s how you do it
In the last 20 years, the life settlement industry has grown substantially and now purchases billions of dollars’ worth of life insurance policies annually. Agents are the key to this success, as they hold a wealth of information about policyholders and their personal and family situations.
Settlement providers receive the applications, process and underwrite them. And they prepare settlement offers with sources of capital prepared to purchase the policies for cash. Term policies are particularly attractive if you draw up a strategic plan.
Know your clients
The first step is to review your client portfolio for customers whose convertible term policies are nearing maturity. In particular, people who purchased large face-value policies a decade or more ago may encounter increased premiums in order to renew or convert.
In today’s economy, coverage may appear less attractive than the cash. The temptation is strong to simply let the policy lapse at maturity without perceiving any potential asset value at all. Your advice can make the difference between a customer selling their policy and receiving a cash payout, and them simply letting the policy lapse. Understand their life insurance needs
Most, though not all, term life insurance policies are convertible. It is likely that you have advised term buyers to pay the slightly higher premium so that their policies can be converted in the future and to make sure that they remain insurable. The customers who heeded your advice comprise your potential market, and now is the moment that your counsel can pay off for them.
Older customers may not be aware of, or have forgotten about, the conversion option. Among your convertible term policies in force, how many are due to expire in the next few years? Particularly for a term policyholder who is elderly, sick, or not otherwise eligible for a new, permanent policy, converting that term policy might be the only option for them to keep coverage. Thus, a term-to-perm conversion could be a windfall.
Seniors with at least $500,000 in convertible term life insurance coverage are the most obvious candidates. A life settlement appraisal requires you to prepare a simple application and obtain permission to access the policyholder’s medical records.
The basic premise for “term-to-perm” conversion is that the policy be convertible term, be within the authorized conversion period determined by the carrier, have a minimum face value of $500,000, and that the policyholder is over 70 years of age. Life settlement providers now provide a free annual evaluation of policies, so clients have an understanding of policy value moving forward.
If these conditions are met, choosing a life settlement presents clear advantages:
• Underwriting from the existing policy typically transfers to the new, permanent whole life or universal life policy, expediting and reducing the complications of the process.
• Cost of conversion is built into a life settlement. All charges, including commissions and the initial permanent policy premium, may be considered in the agreement with the life settlement partner, so policyholders face no out-of-pocket costs.
•“Found money:” Rather than holding an expiring term life insurance policy with high annual costs and little or no asset value, policyholders will have agreed (in advance) to receive a cash settlement proportionate to the value of the newly acquired permanent life policy. Likewise, agents are eligible to receive standard commissions on the permanent policy and a predetermined commission on the life settlement conversion. Teamwork is key
Once agents have made the decision to offer life settlements to their policyholders, they sign a letter of intent with a settlement partner, undergo training (such as a Certified Life Settlement Consultant qualification), if desired, and begin to contact clients and submit applications.
The cash life settlement offer given to policyholders is based upon many factors and priced on a case-by-case basis. Two key issues are the policy’s face value and the policyholder’s estimated life expectancy. After you submit an application and your life settlement partner evaluates it, an offer is extended to the policyholder/seller. The offer should provide your client with a substantial cash settlement.
The purchasing company agrees to pay the life insurance premiums for the remainder of the policyholder’s life, and in return, the purchaser is paid the death benefit when the policyholder passes away.
The future of convertible term policies
Looking forward, the value of convertible term for younger market segments is clear. Agents with aging baby boomer clients, for example, should be selling convertible term policies as the low-cost means to prepare for a future life settlement.
From a commission standpoint, life settlements can be an important integrated revenue source. In addition to the commissions earned, the process can also provide opportunities for new life insurance policy sales with fresh clients, or alternatives, such as estate planning, with the same clients.
Today, more than ever before, the success stories are a result of strong, strategic planning. As a professional financial counselor, you should add life settlement alternatives as profitable options in your strategy for elderly convertible term customers.
Stephen E. Terrell is president of LifeGuide Partners, LLC, a company that generates current market values for life insurance policies for agents and their senior life insurance clientele. He can be reached at (888) 484-3350 and on Twitter at @Tweet_Stephen.