Your Client’s Life Insurance Policy May Be on the Chopping Block
As inflation spirals, retirees are at greater risk of allowing life insurance to lapse.
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.
In some cases, the cash proceeds can reach as high as 60-80% of the policy’s face value. Clearly it is in the policy owner’s best interests for agents to at least explore the option with them.
It’s also important to note that term policies, if convertible, may qualify for a life settlement.
Retired Business Owner Sells $2 Million Term Policy for $600,000
We recently brokered a life settlement transaction for an agent whose client owned a key person term policy that became obsolete when he retired. The premium payments were becoming a burden and the client was looking for an escape hatch.
After conducting a thorough review of his client’s need for life insurance coverage, the agent recommended they convert and sell the policy in the secondary market.
We were brought in to broker the transaction and submitted the case to 17 potential buyers.
We were successful in generating competitive offers from seven institutional money sources that ranged from $180,000 to $600,000. The client and his family were stunned to receive such a cash windfall for a policy they thought had no value.
Opportunity for Insurance Advisors
The current economic climate presents an opportunity for insurance professionals to take a leading role in helping senior clients make informed choices that are in their best interests.
Reach out to other professionals in your referral network (e.g. financial planners, CPAs, estate attorneys, bank trust officers, etc.) and offer to provide your professional expertise regarding the growing life settlement market and the option for clients to monetize life insurance policies that have become marginally beneficial.
Consider sharing with your older clients and professional referral sources our collection of life settlement success stories that clearly illustrate the financial advantages of selling excess or unwanted life insurance coverage — especially policies that are on the verge of lapse or surrender.
Takeaways
Today, as seniors begin to feel the sting of higher inflation and look for ways to slash expenses, more policies will be at risk of lapsing.
Selling an unwanted policy in the secondary market can help seniors salvage a portion of their insurance investment and can often provide an unexpected cash windfall for their retirement.
When the decision is made to explore a life settlement, be sure to work with an experienced life settlement broker who will negotiate with multiple secondary market buyers to obtain the highest possible offer.
Life settlement brokers, including Asset Life Settlements, have a fiduciary duty to represent the policy seller’s best interests — not the buyer’s.
A good broker should be able to provide an immediate pricing analysis. Our firm, for example, offers an online pricing calculator.