Your insurance policy may be worth more than you think! Do you know how to unlock the hidden value?
by Mark Mrky
Life insurance has been a critical part of American society for many years, with over $3 trillion in death benefits owned by individuals over the age of 65 alone. But what happens when the original need or circumstance for owning a life insurance policy changes?
You may be surprised to discover that around $140 billion of life insurance, representing over 500,000 individual policies, lapses or is returned to the carrier every year by those over the age of 65. According to the 2019 ACLI Fact Book, over 90% of individual life insurance policies terminate without paying any death benefit! More shocking still is that the majority of individual policies lapse, and the policyholder receives nothing in return. Many policy owners pay thousands of dollars for valuable coverage only to end up walking away from their policy with little or nothing to show for it. Would you walk away from your home, stocks, or other financial assets without tapping into their significant value?
What is the “secondary market” for life insurance?
Until recently, when your need for life insurance coverage no longer existed, and the policy had become obsolete or unaffordable, your only option was to return the policy to the insurance carrier and take the cash surrender, if available. Times have changed, though, and a financial professional can now appraise a policy in the secondary market for its actual value, which is the amount over and above the life insurance carrier’s cash surrender value. Such an evaluation is the cornerstone of a little-known but widely accepted option known as a “life settlement.”
In simple terms, a life settlement is the sale of a life insurance policy to a 3rd party for an amount above the insurance carrier’s cash surrender value. To qualify for this free non-binding appraisal of your life insurance coverage, you simply need to be over the age of sixty-five and own virtually any type of insurance policy with a death benefit of $100,000 that has been in force for a minimum of 2 years.
Universal life policies and convertible-term policies continue to be the preferred policy of choice in today’s life settlement market. You might even own a term policy that could be evaluated for a potential life settlement, provided that the policy is still within its conversion period.
How do you sell a policy?
The application process for a no-cost, non-binding appraisal is typically 4-6 weeks from receipt of an approved and regulated life settlement application by your chosen insurance company. The company then obtains your medical records from the past five years. Your selected organization must strictly adhere to Health Insurance Portability and Accounting Act (HIPAA) compliance regulations.
Dozens of financial institutions may bid to purchase your policy. Or, a policy owner could choose to go directly to a single licensed provider such as the ones you’ve probably seen in television commercials. Most companies advertising on TV are legitimate, but it’s essential to be aware that these businesses may not always prioritize your needs. That’s because the kinds of buyers who advertise on television and radio are usually purchasing policies for a financial institution, pension fund, or private investment group. Thus, these companies have a fiduciary obligation to the underlying fund they represent first. They are likely to be more inclined to act in the best interest of their clients rather than yours. Or you can choose to appraise your policy through a licensed broker who will present your policy to multiple licensed buyers for consideration. A broker has a fiduciary obligation to the policy owner to “shop” a client’s policy to various buyers, creating a competitive bidding scenario. Commissions taken by the client’s advisor and or broker can be as high as 30% of the gross offer. All offers and compensation are disclosed and agreed upon by the seller prior to sale.
The proof is in the DATA.
In 2023, the life settlement industry purchased over 3200 individual policies and paid out over 842 million to consumers for the sale of their unwanted insurance policies. (Life Insurance Settlement Association 2023 data). The amount paid via life settlement was 6X higher than the cash surrender values offered by the life insurance carrier. In fact, according to the US Government Accountability Office (GAO) report, a typical senior realizes a life settlement amount that, on average, is four to seven times greater than the policy’s cash surrender amount. Simply put, for every $1,000 an insured would have received via surrender, the money they would receive in a life settlement would be $7,000.
Forty-three states currently regulate life settlements, affording approximately 90% of the US population protection under comprehensive life settlement laws and regulations. In 2010, the National Conference of Insurance Legislators (NCOIL) adopted the Life Insurance Consumer Disclosure Model Act, which requires insurers to provide written notice to policyholders who are facing the lapse or surrender of their policies.
This notice must state that seniors have options regarding lapse or surrender, including the option of a life settlement. Since transparency is a key component of life settlement regulations, several states have comprehensive regulations requiring policyholders to receive substantial consumer disclosure and education when considering a life settlement.
Life Settlement PROS:
- Immediate Cash: One of the primary benefits of a life settlement is that it provides an immediate cash payout to the policy owner. Having cash in your pocket is fantastic if you need funds for medical expenses, debt repayment, or other financial needs.
- No More Premium Payments: By selling the policy in a life settlement, a policy owner no longer needs to pay any future premiums. Relief from premiums is advantageous if you are struggling to make the payments, especially if you think you may no longer need the coverage.
- Higher Payout Than Surrender Value: In many cases, the payout from a life settlement is higher than the surrender value offered by the insurance company if you just canceled your policy. A higher payout potential means a policy owner might receive more money by selling the policy than by surrendering it.
- Flexibility: You can use proceeds from a life settlement for any purpose. Such flexibility allows a policy owner to address immediate financial needs or perhaps invest the funds.
Life settlement potential CONS:
- Tax Implications: Depending on the specifics of the transaction and the policy owner’s circumstances, a life settlement may have tax implications. The proceeds from the sale could be subject to income tax, and there may also be potential estate tax consequences.
- Reduced Death Benefit: Selling a policy in a life settlement means you’ll forfeit the death benefit that would have been paid out to your beneficiaries when you die. You should consider the implications for estate planning and the financial well-being of your heirs.
- Complexity and Fees: Life settlements involve a complex legal and financial process, often requiring the assistance of brokers, attorneys, and other professionals. These professionals typically charge fees for their services, which can eat into the proceeds of the settlement.
- Impact on Government Benefits: If the policy owner is receiving government benefits such as Medicaid, the proceeds from a life settlement could affect eligibility for these benefits. It’s essential to consider the potential impact on benefits before pursuing a life settlement.
Ultimately, whether a life settlement is the right decision depends on the individual circumstances of the policy owner. It’s essential to carefully weigh the pros and cons and consider consulting with financial and legal professionals before proceeding with a life settlement.
The Takeaway
At a time when many policy owners over the age of 65 are struggling to pay bills and medical and living expenses, a life settlement appraisal on a policy that is no longer wanted or affordable may be one of the most important financial decisions an individual can make. You can raise your stocks, real estate, and other financial assets, so why not your insurance coverage when that coverage may no longer meet your needs? After careful consideration and guidance, a policyholder would be wise to explore this often-overlooked option for a policy they feel is outdated.
For further information on the life settlement industry, visit The Life Insurance Settlement Association (LISA) at www.lisa.org. LISA’s mission is to advance the highest standards of practice and professional development within the industry. LISA educates policy owners and insurance advisors on the value of life settlements as an alternative to lapsing or surrendering their life insurance policies.
About the Author:
Mark Mrky has over 23 years of experience in the life settlement industry. He is a managing partner with Life Insurance Settlements Inc. (www.lisettlements.com), one of the most respected life settlement brokerages in the US.
Reach out to Mark at 954-326-9378 or markm@lisettlements.com
