By Stephen E. Terrell
We all own products that meet very specific needs, but we rely on them only in certain situations. We don’t spend too much time thinking about faucet wrenches, gravy separators or even that telescoping magnetic pickup tool, but we certainly appreciate them on the day we need them.
The same can be said of insurance. Clients don’t think about it until they need it, and on those days, they sure are glad they have it.
Life insurance has been given added utility recently. Clients can sell all of it – but they now can sell a portion of their coverage to meet an immediate financial need while keeping part of the policy payout for their beneficiaries.
Whether it’s for a car, home, health or a life, insurance occupies a place in the background of our lives, at least for most of us. 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, many clients have their premium payments set to be made on some form of auto-pilot, such as a direct debit from a bank account or even from a trust account funded sometime in the past.
Yet while we may think of insurance as residing in the metaphorical junk drawer, the life insurance industry has evolved in such a way that it has actually increased the overall utility of the product, but most people don’t know about it. In fact, it is possible that life insurance could help them solve a current financial problem. Options known as accelerated death benefits, life settlements and retained life benefits all bring opportunities to help seniors facing common financial problems.
Are Clients Feeling Down Over High Premiums?
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 senior passes away. Although it may seem like a strange option, these transactions make a tremendous amount of sense for seniors and retirees who have insurance policies that have become too expensive for them to maintain, 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 also may be impacting premiums. 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.
Seniors Can Sell Part Of Their Coverage, Keep The Rest
Retained life benefits are the newest wrinkle. For years, seniors who knew about life settlements have asked if it is possible to sell only a portion of a 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 an 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 some financial payout to loved ones in the future. By selling a portion of their coverage while keeping a portion of it, a policyholder gets the best of both worlds.
Old Options May Help A New Problem
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. In addition, the insurance industry also created ways for terminally ill policyholders to get help. Policies with an accelerated death benefit rider enable an insured to receive a portion of their life insurance money early — to use while they are still living.
For seniors, life insurance may live in their mind’s junk drawer, but a quick review of options may find that one person’s junk may fund another’s golden years.
Stephen E. Terrell is president of ALifeSettlement.com. He may be contacted at [email protected].
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