3 Red Flags in Life Settlement Queries

1. The Wrong Policy

Universal life and term life that is convertible to universal life get the most attention from investors.

Guaranteed premium universal life policies on insureds over 70 are especially attractive, even if the insured is currently in good health.

Term policies are frequently overlooked by producers, even though they often make excellent life settlement prospects.

Whole life policies, on the other hand, build significant cash values. They would need to attract offers that exceed the surrender value, and that rarely happens.

If both insureds are still alive, survivorship policies are not commonly purchased, but it is possible if both are in very poor health.

On the other hand, survivorship policies with only one insured still living can make excellent settlement prospects.

Small face amounts and policies from poorly rated companies are typically not attractive to life settlement investors.

Usually, face amounts of $500,000 and up are preferred, but there are exceptions that go down to as low as $100,000.

The smaller the face amount, the shorter the life expectancy must be for settlement buyers to be interested.

And, of course, policies must be beyond the contestability period.

2. The Wrong Insured

Generally, prospects should be age 70 and above with some decline in health since the policy was issued.

Typically, the insured will have become uninsurable or highly rated.

The younger the insured, the more significant the health issues must be.

Occasionally, policies sell at younger ages, but the insured would have to have very, very serious and predictable health problems (i.e., ALS, metastasized cancer).

3. The Wrong Situation

When a possible prospect says, "I'll sell this policy if I get a good enough offer," that's a statement that screams you do not have a prospect.

It means, "Sure, go shop this thing, but I still have use for it, I can afford it, and I'm really not planning to get rid of it.

It is like the neighbor whose home is always on the market, but it never gets sold.

A life settlement is an alternative to terminating a policy, not to keeping one.

Life settlement investors make their offers targeting double-digit returns.

Applying that kind of math means a policy owner will never get a good enough offer to offset the likely value of the policy to the policy owner unless the policy is about to lapse or be surrendered.

So productive life settlement prospecting means looking out for those situations where a policy is likely to be terminated.

There are many reasons a policy may be lapsed or surrendered, but certain scenarios seem to be the most common for a life settlement.

◆ Retirement. People commonly review their financial resources and expenses upon entering retirement.

At that time, it is not unusual to find policies that are no longer needed that were bought to replace income upon the death of a wage earner.

Additionally, the cost of such policies, especially if term insurance, may become unaffordable.

These policies can be great candidates for a life settlement, and the proceeds can really make a difference in retirement.

With the aging and retirement of baby boomers, they represent a massive market for potential life settlements.

◆ The policy is no longer affordable due to policy performance. Interest rates were at historic lows for years, and as a result, many policy owners are now being blindsided by premium requirements that dramatically exceed what they expected to pay when the policy was bought.

In addition, premium increases may also disturb their estate plans by exceeding their annual gift tax exclusion.

◆ Term policies or riders that are about to expire or come to the end of their current premium guarantee or lose their conversion privilege. Term policies are the life settlement prospects that are most often neglected.

Many advisors and clients don't realize that a term policy (including group term), if convertible, can be sold in a life settlement. Since term policies almost never have cash surrender value, a life settlement can truly provide "found" money.

◆ Chronic disease or illness. While a chronic health condition would ordinarily be a time when the death benefit of a life insurance policy would seem most imminent and most valuable, certain illnesses are long-term in nature and require very costly medical or custodial care.

When all else fails, a life settlement can provide critically needed funds to help pay for those expenses.

◆ A decrease in estate tax liability. The Tax Cuts and Jobs Act of 2017 not only reduced the number of estates subject to federal estate tax to roughly 2,000 annually but also substantially reduced the estate tax liability for those estates that remain subject to the estate tax.

As a result, some policies purchased to offset estate taxes are no longer needed for that purpose.

While holding on to the policy might still be a good deal for their heirs, people are usually reluctant to keep more life insurance than is absolutely necessary.

◆ Business owners exiting their business through sale, liquidation or retirement. While operating their companies, business owners usually acquire a number of life insurance policies for reasons that include funding buy-sell arrangements, obtaining key-person protection, participating in fringe benefit plans, getting protection against creditors and even funding pension policies.

Typically, the business was paying for these policies in some manner, either directly, if the policy had been business owned, or indirectly, using a bonus or split-dollar arrangement.

With the business no longer in the picture, both the need for the policy and the ability to pay for it may have ended, making a life settlement worth exploring.

When a red flag comes up in your prospecting, that likely means that you don't have a case. But, for a policy that is about to be lapsed or surrendered, a life settlement may offer significantly greater proceeds than accepting the insurance company's surrender value, if any.

This additional cash can make a meaningful difference in the lives of your clients.

And who knows – you just might hit a home run!

Robin S. Weinberger, CLU, ChFC, CLTC, is the director of national accounts for Life Insurance Settlements Inc. She has been a general agent and director of national accounts for Connecticut Mutual and vice president of marketing for Sun Life of Canada.

Peter N. Katz, JD, CLU, ChFC, RICP, is a life settlement broker and co-director of national accounts with Life Insurance Settlements. He is also a consultant specializing in life insurance advanced sales illustrations, and he has served as an advanced markets attorney and in product development.