Based on 2008 data compiled by publicly available sources, more than 250,000 universal and variable universal policies with a face value of approximately $57 billion were lapsed by seniors over age 65. When term and whole life policies are included, the number of policies exceeds 1.1 million with a face value of $112 billion. If the data were available for 2014, the amount would be even greater.
So, why shame on all of us? This data illustrates that tens of thousands of seniors with billions of dollars of life insurance are forfeiting potential financial benefits from policies that are simply lapsed back to the carriers. Why is this so? Lack of awareness!
For example, a 2010 survey prepared for the Insurance Studies Institute reported that more than half of seniors over the age of 65 are not familiar with the option to consider selling their life policy. Further, 90 percent of seniors who have let a policy lapse would have considered selling it if they had known a life settlement was an option.
In addition, a 2012 survey prepared for The Lifeline Program conducted by ICR indicated that 79 percent of clients feel advisors should inform them about a life settlement option.
What about life insurance companies themselves? A 2010 Society of Actuaries survey indicated that 50 percent of life insurers would terminate agents for participating in a life settlement. So, why don’t they inform consumers about available options that should be considered when lapsing a policy? The most obvious reason is the enormous amount of lapses adds significant profits to their bottom lines – i.e., “lapse-based pricing.”
The rationale, however, that the absence of lapses would cause a significant increase in the cost of life insurance for future consumers is a speculative argument.
The reality is that six states have passed some form of Consumer Disclosure legislation regarding notification of options available to lapsing a policy, including a life settlement. In the absence of insurance companies voluntarily informing their policyholders about these options, efforts to expand Consumer Disclosure legislation should be aggressively advanced in all states.
So, what does all this mean? There is a financial tragedy occurring in the senior population when billions of dollars of life insurance no longer needed or affordable is lapsed without knowledge of options that might be considered.
Would these options work for everybody? Obviously not. Would a life settlement work for everyone who considers lapsing a policy? Of course not. But to lapse a policy without knowledge about alternatives should be unacceptable to all of us.
Aside from any legal definition or inference of fiduciary responsibility, there certainly should be a moral obligation to inform and educate ourselves and our clients about the fact that a life insurance policy is a very important asset that should be managed within the context of all other assets. When, as a study by Allianz Life Insurance reports that people age 44-75 fear running out of money (61 percent) more than dying (39 percent), it’s time to do something.
Collectively and cooperatively, advisors, the life insurance industry and the life settlement industry could bring a level of understanding and education to consumers about options that should be considered before lapsing their insurance policies.
We should consider such an undertaking as a great public service and our duty. If we do not do so, then yes, shame on all of us.