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Life Settlements as a Hedge Against Inflation

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What You Need to Know

  • In June, consumer prices rose at the highest rate in 13 years.
  • For some consumers, selling an unwanted life insurance policy could help compensate.
  • Permanent policies will usually sell for more than term life policies will.

For agents and advisors who are under 50, the term “inflation” does not have a huge meaning beyond the textbook definition. Most folks from Generation X and younger did not experience the specter of inflation that haunted the 1970s — but their clients did.

Many baby boomers, who are prime life settlement candidates, were coming of financial age in the 1970s when prices and interest rates were out of control. High gas prices and mortgage interest rates get most of the historical attention but rising costs for many commodities were also very troublesome.

Today’s seniors remember those inflationary times, and it’s absolutely a concern for anyone working to protect their retirement nest egg. Rising prices and costs of living are the great fear of anyone in retirement or who is planning for retirement.

The Latest Numbers

Recent news proves that inflation is on the minds of many as the government recently reported that U.S. consumer prices rose 5.4% in June from a year earlier, keeping inflation at the highest annual rate in 13 years.

According to the Bureau of Labor Statistics, gasoline prices are up 56% while fuel oil is up 50%. Used cars and trucks are up 30%, and airfares are up 24%. This list goes on as car insurance is up 16% and natural gas is up 13%. Medical services, electricity, and many other costs also have risen, maybe only a few percentage points but risen, nonetheless. And we are also seeing inflation in the grocery store, though the price increases are not as dramatic. (Except for chicken wings. For some reason, chicken wing prices are through the roof. Time to become a leg man.)

A Secret Weapon

For inflation-wary clients who have life insurance, a policy appraisal is a good recommendation. They need to understand that they have an option if they have a life insurance policy because life insurance settlements pay cash for clients who need to supplement their income — and a life settlement is not correlated to the stock market.

For clients who have old term or whole life policies, they need to understand what a policy might be worth if they need to sell it to offset rising costs. The life settlement market is not aligned with the stock market either, so it provides an interesting “hedge” again all manners of downturns. Policies that were nearly forgotten could become a financial lifesaver for those clipped by rising costs. Any client who is worried about inflation or how they will afford things in the long term needs to have their life insurance policies appraised.

Term Life v. Permanent Life

As inflation increases, the big loser is term insurance, as the ultimate value of that term policy is going down. Due to inflation, the amount of life insurance that your clients buy today will not be worth the same amount in the future.

For example (using some unsophisticated arithmetic), if inflation averages 3% per year, a policy would be worth 30% less in 10 years.

A $1 million term policy would only have the purchasing power of $700,000 in today’s dollars.

Whole life is a better hedge against inflation because its cash value is generally being invested, and it should be outperforming the impact of inflation.

For clients with term policies who are worried about inflation, a term-to-perm to life settlement might be the proper solution. It will enable the policyholder to get a current value out of that policy right away, which can then be invested as a way to hedge against inflation.

In a term-to-perm transaction, the agent works with the client to convert the term policy to a form of permanent insurance, either whole life or universal life. Next, a policy appraisal will enable the client and the advisor to understand the full market value. Lastly, with the appraisal in hand and a minimal financial outlay, a client can fairly quickly make a substantial gain. The agent or advisor can then work with the client to invest the settlement in a way that helps hedge against inflation and rising costs.

Think Ahead

Today, advisors and agents should assume their clients are worried about inflation, and they should recognize that concern is not something that financial professionals can just brush off. One can’t say, “We will never have inflation like the ‘70s again,” after we just spent the past 18 months fighting a global pandemic that no one saw coming. While time will tell if inflation will become a problem for today’s seniors, the current fear is real, and a life settlement may be the answer for your clients. Determining whether that’s the case should start with a policy appraisal.


Wm. Scott Page (Photo: PolicyAppraisal.com)Wm. Scott Page is the founder of PolicyAppraisal.com.

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