By Stephen Terrell
Advisors are constantly looking for ways to help their clients, but sometimes the nature of insurance works against them. For many clients, insurance is a financial product which they largely forget about. Whether it’s for a car, home, health or a life, clients prefer to have that insurance policy sit in the background of their lives. When clients use insurance, it usually means something has gone wrong, such as a car accident, roof damage, a hospital stay or, most sadly, a death. In fact, most clients don’t think about insurance very often, and they usually have set the premium payment to be made on some form of auto-pilot, such a direct debit from a bank account or even from a trust account funded sometime in the past.
In recent years, the life insurance industry has evolved in such a way that it has actually increased the overall utility of the product. However, many consumers who have life insurance don't even know about the new options. It's quite possible that life insurance, which many folks rarely even think about, could help them solve a current financial problem. Accelerated death benefits, life settlements and retained life benefits all bring new options for those holding life insurance, as well as for agents who sell policies and the wealth managers and advisors who recommend them.
Life settlements can relieve premium pressure. A financial option for seniors has come of age in the past few years as a way for seniors to pull value from a life insurance policy that they no longer need or want. A life settlement enables a healthy senior, typically with a life expectancy of 8-12 years, to sell a whole life policy for immediate cash. A life settlement company purchases the policy, pays the premiums and then collects the death benefit when the insured passes away. These transactions make the most sense for seniors and retirees who have insurance policies that have become too expensive, or if their financial need for the policies has changed.
For example, a policy might have been purchased with a spouse as beneficiary, but then the couple gets divorced or the expected beneficiary passes away. Also, in many cases, escalating premium costs become a financial drag for seniors, and they choose to sell a policy rather than cash it in for less money or allow it to lapse.
For those holding universal life insurance policies, cost of insurance (COI) charges may also be impacting premium requirements. COI charges have been on the rise, adding another reason why some policyholders may be looking for an exit that could be supplied by a life settlement.
Retained life benefits are the newest wrinkle. For years, clients have been asking if it is possible to sell only a portion of life insurance policy, so that their beneficiaries could receive at least a partial payout when the insured dies. The answer to that question recently arrived in the form of a new transaction called retained life benefits. By selling only a portion of a policy, beneficiaries retain a percentage of the policy death benefit without any future premium obligation.
This type of transaction works best with whole life policies with face values ranging from $1 million-$20 million. This provides a great option for seniors and retirees who are searching for ways to improve their golden years. Retained life benefits transactions offer a way to get relief from rising premium costs while still being able to provide a financial payout to loved ones in the future, albeit not the full death benefit. By selling a portion and keeping a portion, a policyholder gets the best of both worlds.
Options for the terminally ill. During the 1980s, when the AIDS epidemic was plaguing the world, the insurance industry and some entrepreneurs developed new ways for those facing a terminal illness to use life insurance. A viatical settlement, which is a regulated transaction in most states, enables a terminally ill person (typically someone with a life expectancy of less than six months) to sell a life insurance policy for immediate cash. While these transactions were created as a direct result of the AIDS crisis, they are still viable today in certain situations for individuals facing terminal illnesses. In addition, the insurance industry also created ways for terminally ill policyholders to get help. Policies with an accelerate death benefit rider enable an insured to receive a portion of their life insurance money early — to use while they are still living.
While most individuals rarely think about their life insurance and may have not looked at their policy in years, the industry that supports that policy has been evolving and creating new offerings which may make the policy more useful and valuable. Agents shouldn’t hesitate about discussing options suchas life settlements and retained life benefits with clients, as they provide a way to uncover hidden wealth for a more prosperous retirement.
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].