An Alternative To A Life Settlement

By Grace Bronstein and Michael Krasnerman

The COVID-19 pandemic has made it more difficult for life insurance agents to engage with their clients on a personal basis.

In the past, life insurance agents conducted most of their sales face to face, and their relationships were built on social rapport. These meetings have been replaced by telephone calls and virtual meetings.

Although life insurance sales increased in 2020 and 2021 due to fear of COVID-19, most of the policies sold had low face values and were for insureds in their 40s and 50s. According to LIMRA, 88% of the policies sold in 2020 were whole life and term life insurance.

The majority of new policy owners were in their 40s, while the purchasing activities of those more than 60 years old remained stagnant. As a result, it became more difficult for agents to sell large permanent life insurance policies. However, most life insurance agents do not realize that their existing client base of people more than 70 years old – people to whom they have already sold insurance to in past years - is rife with opportunity.

Agents have many clients who cannot replace their life insurance because of their age or health. Occasionally, these clients will call their agents to discuss a potential life settlement.

However, agents now realize that life settlement transactions are not profitable for their clients or for themselves. Life settlements eliminate all the policy owners’ original motives for buying insurance – tax planning, estate planning and family protection. Policy owners give up substantial future tax-free proceeds in exchange for a small percentage of the death benefit, and they then must pay ordinary income tax and capital gains tax on that benefit.

Life insurance agents now can offer their existing clients a product that allows policy owners to keep their policies while eliminating their out-of-pocket premium payments. Nontraditional nonrecourse financing enables policy owners to borrow against their policies without any additional outside collateral. Most important, this financing is available for existing in-force policies, while in the past, premium financing was available only for new policies.

By obtaining cash advances or premium payments, policy owners can maintain their policies for their estate planning and family needs while reducing or eliminating their out-of-pocket premium payments. Agents should reach out to their existing clients who cannot replace their policies and offer them this unique product as a means of obtaining additional liquidity using only their policy as collateral. This is a new opportunity where agents can make high referral fees, and insurance wholesalers can make even greater fees.

Policy owners who previously have financed their policies with traditional loans that require cash collateral can now pay off their debt and release their cash collateral.

To illustrate how this works, here is an example of a recently closed transaction.

The owner of a policy with a death benefit of $15 million had borrowed five annual premiums of $750,000 a year from Wells Fargo, totaling $3.75 million plus interest. The policy’s cash surrender value was $1.5 million. As this was a traditional loan, the policy owner had to pledge a $2.5 million certificate of deposit to Wells Fargo. If he borrowed an additional $750,000 to pay for this year’s premium, then he would have had to increase his collateral to $3.25 million. However, he could not do this due to changed circumstances.

Instead, his advisor learned about nontraditional nonrecourse financing in which the lender repaid the bank’s entire $3.75 million loan, which released his cash collateral back to him. In addition, the lender agreed to finance the policy owner’s premiums for the next 10 years without any outside collateral.

Existing clients present an untapped market but are regularly ignored by their life insurance agents. Clients whose insurance cannot be replaced typically call their agents only to discuss payment changes or to review their existing policies, while agents often do not call them at all. With this innovative financing program, agents can now offer this group of clients a new product. Chasing new clients to sell new insurance is far more challenging and time-consuming than reaching out to loyal clients whom agents have known for years.

Grace Bronstein is the CEO of TrustLife Insurance Management, an advisory firm that supports life insurance advisors, CPAs, trustees, and estate planning attorneys in managing trust-owned life insurance. She may be contacted at [email protected].

Michael Krasnerman is the CEO of AllFinancial Group, an asset management firm focused on life settlements. Michael has more than 30 years of experience as a life insurance agent and is a member of MDRT, AALU, NAIFA and International Forum. He may be contacted at [email protected].