If you’re in a position to counsel individuals with their personal finances, ask yourself this question: if your client no longer needed their home or found it was no longer affordable, would you allow them to just surrender it back to the builder from whom it was purchased or would you engage them in a discussion about possible alternatives, such as selling the property to a prospective buyer?
As absurd as the question may sound, it’s an all too real analogy of something that takes place every day in the U.S. when it comes to life insurance policies.
A life insurance policy is in the same category of personal property as a home and should also be evaluated for possible sale if it’s no longer needed or affordable. Yet new data shows that seniors over age 65 lapse more than 376,000 policies each year, which collectively totals more than $88.9 billion in face value (not including the more than $23.7 billion of whole life insurance policies that are surrendered as well). And that analysis is from data of eight years ago, so those figures are sure to be even greater today.
A majority of American seniors lapsed their policies without knowing — either by themselves or from their advisors — that alternatives are available, including a life settlement. Ninety percent of seniors who lapse policies without knowing about a life settlement indicated they would have considered that option had they known about it and 79 percent feel their advisors should have informed them of the option. This should be a wake-up call to all of us in the financial services industry.
It is time the members of the financial planning community become educated about the fact that a life settlement option is one that, at a minimum, should be explored when managing portfolios of their senior clients.
Let’s recall that there was a time when annuities were considered taboo, and the same goes for reverse mortgages. Those alternatives are commonplace today in the toolkit of financial planners and advisors. Of course, neither annuities nor reverse mortgages are appropriate for everyone and every situation — and neither is a life settlement. In fact, a life insurance policy should be kept in-force when it will serve the best interests of a client. But when it is no longer needed or affordable, lapsing the policy without considering options should be a no-no for all seniors and their advisors.
As more financial professionals understand the role of life settlements in the financial planning process, there is a growing chorus of voices calling for more pro-active and transparent disclosures about life settlements. Developments in some state legislatures portend that life insurance carriers may eventually be obligated to inform clients about the life settlement option for policies that are determined to no longer be needed or affordable, prior to lapsing the policies. This “Seniors’ Right to Know” movement may eventually create a duty to inform for financial advisors, so financial services professionals who seek to be ahead of the curve are already engaging in more pro-active consultation with seniors about their life insurance assets.
Until recently, a life insurance policy was only considered to be a valuable asset after a senior passed away; therefore, simply for the financial gain of the named beneficiaries. Now, as an important asset included in the entirety of a senior’s portfolio, that same life insurance policy can be a potentially valuable resource to provide needed cash resources within the overall financial plan right now.