By Stephen Terrell
The life settlement industry began more than 20 years ago, offering a means to lift the financial burden from those suffering from devastating illnesses. Today, life settlements are thriving as a financial option not only for those needing assistance with funding retirement but also for high-net-worth seniors and shrewd financial professionals.
Increasing long-term care costs as well as increasing life expectancy are the two main drivers for the life settlement industry. According to a report published by AARP in 2011, the number of people who will reach the age of 100 will increase 900 percent between now and 2050. Unfortunately, our economy is not structured to accommodate the massive influx of so many elderly people who will likely require long-term care. Life settlements are becoming a mainstream option as unwanted or unneeded life insurance has the potential to help fill the gap.
A consequence of increased life expectancy is that the longer a policyholder lives, the higher the cost of a life insurance premium becomes. Eventually premium rates will reach a point where the premium becomes too high to maintain. Instead of simply allowing a policy to lapse, it makes far more financial sense for seniors to opt for a life settlement and receive a windfall they have helped accumulate over time.
What Policyholders Should Know
In their 50s. Policyholders in their 50s should evaluate their life insurance coverage and ensure that their policy term extends into their 70s, when a life settlement becomes a viable option. A term policy with a conversion rider may be fairly easy to extend, and such policies can be converted to permanent coverage and sold into the life settlement market.
In their 60s. Policyholders in their 60s should evaluate their coverage and look at all possible ways to keep coverage in force for the next 10 years. Life settlement providers will evaluate clients free of charge. Agents can illustrate the costs and benefits of keeping coverage in force. Is it worthwhile to keep coverage in force for a few more years, if the payoff could potentially be in the six-figure range once the client reaches his or her 70s? Most agents and clients will say “yes,” and the client deserves to know about it.
In their 70s. Seniors with unneeded or unwanted policies often reach a crossroads. Many factors will point a senior toward the options of not renewing policies, cashing them in for the value that whole life insurance has built up over time or simply letting the insurance lapse. In doing so, the policyholders receive nothing in return after years of paying premiums. Policyholders in their 70s need to be educated quickly about the benefits of life settlements in the very short term. They can receive cash for something they likely were likely to let lapse.
Life settlements are not for everyone. Although there is little risk for consumers, there are instances when a settlement is not the right choice for policyholders.
Not an investment option for individuals. Investing in life settlements is strongly discouraged for all but the most experienced investors. Most life settlement companies do not accept individual investors, and we don’t advise any individuals to invest their retirement savings in the industry. It is a much better match for pension funds, endowments and hedge funds.
If a policyholder has the means to keep the policy in force, keep the policy in force. If a policyholder has the financial means to keep a policy in force until their death, we advise them to forgo a life settlement. Payment of the death benefit to beneficiaries will always be much higher than a life settlement. However, if paying premiums becomes a financial burden, we recommend life settlements as a way to exit policy ownership with cash in pocket.
If insurability is an issue. An individual can only own a certain amount of life insurance. Once a life insurance policy is sold to a life settlement provider, the coverage remains in force and it may affect future insurability. If policyholders want to replace coverage – either in the short or long term – then they must be certain that insurance companies will be willing to write future policies, knowing the original coverage will be in force until their demise. There have been instances where individuals who sold policies were unable to replace it when it was needed.
Life settlements provide a valuable service for seniors and baby boomers. While they may not be right for every person who has life insurance, we believe all consumers should know about the option and plan for the option if their economic circumstances are a long-term fit. Financial advisors and life settlement providers can quickly inform you of your options. Above all, policyholders should pay attention to their life insurance policies and research all their options.
Stephen E. Terrell is senior vice president of market development and branding of The Lifeline Program, a life settlement provider based in Atlanta, Ga. Stephen may be contacted at [email protected].
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