By now, you probably know that clients who no longer want or need their life insurance policy have the opportunity to sell their policy for a lump-sum in cash through a life insurance settlement. But, what if getting a lump sum of cash is not in the best interest of the client? How can life insurance settlements be creative in these cases?
Allow me to demonstrate with a look at one couple’s situation:
The husband is in his late 50s. He has a $500,000 term policy. He was diagnosed with brain cancer almost 10 years ago and went into remission. The cancer recently came back very aggressively. His doctor had written a letter stating that he had six months to live. He researched life settlements, and he received an offer of $380,000 for his policy through another company. The client’s wife did not think this was a high enough offer.
The life insurance agent contacted me, explained the situation, and asked if there was a way to help the couple. By the time the agent and I had this discussion, it was three months after the date of the doctor’s letter. To close on a life settlement could take an additional 30 days, so now there would be only about 60 days left. The couple would be giving up $120,000 if they sold the policy with the offer on the table.
This is a heart-breaking situation. As you can imagine, many questions came to mind, including:
- Why is the client looking to sell the policy, especially given the state of his health? The couple needed the money to pay bills.
- What about using credit cards, or a loan on the house, to get them through? Already done and maxed out. No other options.
- What about any critical illness or accelerated death benefits in the policy? The agent tried to convert the policy to a whole life policy that had these benefits. The carrier would not allow it.
- Now what? Put “thinking cap” on.
Two additional solutions came to mind:
- Obtain a loan against the death benefit of the policy – there are several companies that, because of the client’s health situation, will loan money against the death benefit.
- Find a different life settlement solution – one that is creative and makes more sense. An investor group offered to buy the policy for $205,000 cash plus a $250,000 retained death benefit. If the client passed within the first 60 days, his wife would realize $455,000 ($205,000 cash plus a $250,000 death benefit). Each 30 days thereafter, the retained death benefit would decrease a little, with the structure of the arrangement almost emulating a loan with an interest payment. A three-year schedule was submitted.
As of the writing of this article, the client and his wife are deciding which direction they wish to take. At least they now have several different options to choose from, which could help them realize a better return than simply selling the policy for cash. A creative life insurance settlement structure is one of the options.