Your Client’s Life Insurance Policy May Be on the Chopping Block

As rising inflation continues to erode purchasing power, many retired seniors are looking for ways to slash unnecessary expenses.

Life insurance policies, especially those that are no longer relevant for income protection, may be on the chopping block. Retirees who are struggling to make expensive premium payments for a policy they now consider to be marginally necessary may be tempted to let the policy go.

For more than 200 years, owning life insurance has provided financial protection for families against the risk of premature death, disability, and insufficient retirement income.

Recently, the COVID pandemic spurred a significant boost in the number of families purchasing life insurance. The total financial protection provided by in force life insurance policies in the U.S. has grown to approximately $20 trillion.

But only a fraction of today’s in-force policies will ever pay a death claim, due to high policy lapse rates.

As senior clients struggle to realign their income and expenses to adjust for the impact of inflation, life insurance professionals will want to assist older clients in exploring sensible alternatives for policies that are at risk.

Allowing a policy to lapse or surrendering it back to the carrier for pennies on the dollar should be avoided if the client is eligible for a life settlement.

What the Numbers Show

Over the years, payouts to families for life insurance death benefits, income payments from annuities and disability income payments have made a significant social and economic impact on the U. S. economy.

But the reality is, most life insurance policies sold to consumers never pay a death claim.

Many consumers who purchase policies fail to take into account unforeseen economic hardship that may impede their ability to afford the premiums in the future.

As a consequence, most policies lapse or are surrendered back to the carrier and the money the policy owner had invested in annual premiums is gone forever.

The following statistics illustrate the enormity of the economic loss when policies are permitted to lapse:

• 52% of U. S. adults own life insurance. (LIMRA 2021)
• In 2020 alone, over $121 billion in premiums were paid by households for individual life insurance policies. (American Council of Life Insurers)
• 31% of consumers plan to purchase new life insurance as a result of the COVID pandemic. (LIMRA 2021)
• 88% of universal life policies and 85% of term policies fail to pay a death benefit because they are allowed to lapse or are surrendered. (Milliman USA 2004)
• For policies sold to seniors at age 65, 76% of universal life policies and 74% of term policies never pay a claim. (Milliman USA 2004)

According to a study involving one specific insurance carrier, lapse rates for policies issued by the company had nearly doubled during the economic recessions of 2000 and 2009 (Wharton, 2016-18)

Why a Life Settlement Makes Sense

Smart baby boomers in particular are realizing that monetizing the value of an unwanted life insurance policy is simply a prudent financial decision, especially when the alternative is surrendering the policy for pennies on the dollar, or worse, allow it to lapse.

The payout from a life settlement generally averages three to four times the policy’s cash surrender value.