A dollar sign with a crown on its head (Credit: Thinkstock)

Having sufficient liquidity will be the defining economic issue of 2020. Now more than ever, cash is king.

As millions of retired seniors witnessed the value of their retirement portfolios plummet amid the COVID-19 crisis, financial advisors were urging them not to take withdrawals that would lock in losses. This same reasoning was behind a provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which waived the required minimum distributions (RMDs) in 2020 for seniors age 72 or older.

But seniors who had been relying on portfolio withdrawals for a variety of financial needs are now looking to their financial advisors for creative ways to fill the cash flow void.

(Related: When Clients Want to Sell Life Policies, Seek Multiple Offers)

Although many professionals in the financial services industry may feel they are operating in uncharted territory, it’s time to roll up our sleeves, think outside the box, and help senior clients identify cash flow solutions. Indecision and hesitancy do not qualify as creative solutions, but a life settlement does.

For those seniors who are eligible, the cash proceeds from a life settlement could be the lifeline that gets your retired clients beyond the economic crisis.

If you are a financial advisor who has never explored the problem-solving potential of a life settlement transaction, this is your opportunity, the time is here, the moment is now.

Cash Flow Rules

For business owners and individuals who were caught off guard without sufficient cash resources, the months ahead may be difficult as they adapt to the new reality of this unprecedented economic crisis.

But perhaps those hardest hit are retired seniors, whose nest eggs have lost a quarter of their value.

That’s why selling an unwanted life insurance policy, especially policies with escalating premiums or those on the verge of lapsing, is often a smart strategy for seniors who want to generate immediate cash flow. During market downturns, having sufficient liquidity facilitates the ability to achieve a wide range of financial goals depending upon the senior’s net worth, emergency reserves, and cash flow objectives.

Market-savvy seniors want extra cash to invest back into the market while stock values are low. They recognize an opportunity to leverage the financial crisis and need liquidity to seize it.

Market-wary seniors want a source of cash to purchase a guaranteed income stream, such as investing in an income annuity. Their goal is to enjoy a comfortable retirement free from the financial anxiety caused by market volatility.

Cash-depleted seniors want to shore up their emergency reserves to get through the crisis without making withdrawals from their investments. For them, cash is not only king, but cash flow rules.

If there is a silver lining in the 2020 market crisis, it’s the fact that the three scenarios listed above may be readily achievable (for seniors over age 65 who qualify) by selling an unwanted life insurance policy in the secondary market.

A Case in Point

To illustrate our point about market-savvy seniors and life settlements, we recently brokered a life settlement transaction for a 79-year-old senior who owned a $1 million policy with escalating premiums. Over the past 17 years, the annual premiums had spiked to more than $78,000 and were becoming a burden the owner’s cash flow.

Although the policy owner had considered allowing the policy to lapse because it had no cash surrender value, his financial advisor recognized the opportunity to sell the policy in the secondary market for a substantial cash payment equivalent to nearly 30% of the policy’s face amount.

We were asked to broker the transaction using institutional funding sources in the secondary market. The effort generated 16 offers from nine funders. Offers ranged from a low bid of $200,000 to the high winning bid of $287,500. The advisor’s client was stunned to realize he could increase his net worth by more than a quarter million in cash just by selling an unwanted asset thought to have no value.

It’s noteworthy to point out that the client’s life settlement application had already been under contract several months prior to the COVID-19 market meltdown. By the time the transaction was finalized, the market was in a free fall. The client decided this was the opportune time to use his cash windfall to invest back into the financial markets and into a variety of alternative investments.

Life Settlement Proceeds Can Be Used to Purchase a Guaranteed Income Annuity

According to LIMRA, 2019 was a record year for U. S. annuity sales, which were 3% higher than in 2018. Awareness of annuities as part of a comprehensive retirement strategy also gained traction recently when President Trump signed into law the SECURE Act. The new law makes it easier for employers to include annuities in their retirement plan investment options for company employees.

While no one knows what impact the 2020 market crisis will have on annuity sales, some advisors who sold annuity products following the 2008 recession expect to see an increased interest in annuity products. Interest aside, purchasing an annuity takes cash, which for many is scarce now. That’s where the proceeds from a life settlement can help. Financial professionals with clients ages 65+ should be prepared to have a conversation about life settlements as a solution to generate the cash they need.

Inasmuch as our area of expertise does not include sales of annuity products, we were referred by one of our associates to an advisor who specializes in annuity sales, John DiPre of DiPre, Brodnik & Associates in Solon, Ohio. Our goal was to gain a deeper understanding of product demand, especially during periods of extreme market volatility. DiPre noted that it may be too early to predict whether the current market crisis will result in an increase in annuity sales at his firm, but that the topic has certainly become a more important discussion for many of his clients.

He explained that over the past five years, many of his clients have been attracted to indexed income annuities because their monthly income can increase based on market performance, but that income will never decrease. Most of his firm’s clients also maintain a portion of their retirement assets in invested accounts and describe having an income annuity as the best of both worlds.

Take-Away for Financial Advisors

Based on the record number of life settlement transactions that we’ve processed in the first quarter, it’s clear that more advisors and their senior clients are taking advantage of the secondary market to optimize and monetize the value of their unwanted life insurance policies.

Unfortunately, many financial advisors still lack knowledge of the secondary market for life insurance or are misinformed about its utility and soundness. As a consequence, thousands of senior clients are being financially underserved at a time when they are experiencing a financial crisis and need relevant solutions the most.

From a compliance standpoint, many financial advisors who fall under the SEC Reg. BI (Best Interest Rule) will likely agree that a life settlement is a far more “suitable” option than allowing a client’s policy to lapse. And for senior clients who must rely on portfolio withdrawals for monthly cash flow, the ability to use the cash proceeds from a life settlement is certainly a more prudent course of action than allowing clients to lock in losses.

Consumer confidence in the transaction has been boosted by the fact that at least six states (Kentucky, Maine, New Hampshire, Oregon, Washington and Wisconsin) require some type of disclosure that informs consumers who are about to lapse or surrender a policy about the life settlement option. More importantly, progressive regulatory oversight put in place over the past 20 years by a majority of the states now affords regulatory protection to approximately 90% of the U. S. population.

Whatever your clients’ financial and liquidity challenges may be during the current economic crisis, now is the time to consider whether selling an unwanted life insurance policy is the most suitable option to help senior clients generate cash flow.

— Read Life Settlements: What Producers Should Know About Fair Market Valueon ThinkAdvisor.


Hallman, from Frith
Scott Thomas, from Frith

Jeff Hallman is a co-founder and managing partner at Asset Life Settlement LLC. He has been involved in case submission, underwriting, compliance, the institutional bidding process, life expectancy analyses and contract negotiation in the life settlement market. He can be reached at 888-335-4769 x1108.

Scott Thomas is a co-founder and managing partner at Asset Life Settlements LLC. He can be reached at 888-335-4769 x1115.