(Photo and graphic | Courtesy of Rosell Wealth Management)
You — or your client — are on your last (and hopefully best) phase of life. During younger years, ensuring that dependents would be taken care of no matter what or safeguarding against financial downturns made sense. But now, that might no longer be the case. Or maybe you don’t have to worry anymore about estate taxes upon your passing or about any number of other reasons that compelled you to buy life insurance years ago. So why are you still hanging onto that costly life insurance policy when you could trade it in for a pile of fun coupons? Make that a mountain of fun coupons.
How? I’m about to introduce you to life settlements — trading in life insurance you no longer want or need, and that has probably gotten increasingly expensive over the years, for potentially way more than the policy’s cash surrender value. Don’t you hate it when you’ve spent a ton of money on something you don’t need? That can feel even worse if you’re still paying for it.
Does this remind you of your life insurance policy?
I know. You’re tempted to just walk away. But what if you could sell it?
Shockingly, the Wharton School reports 85 percent of term policies and 88 percent of universal policies never pay a death benefit. Instead, they expire, lapse or are surrendered. In short, most people who have purchased life insurance get little to nothing for the money they’ve spent. How much sense does that make? None. You couldn’t want to walk away from a Lamborghini just because you didn’t drive it anymore. No. You’d sell it. Hello! So, if you need (or want) money — and who doesn’t? — you may be able to do precisely the same thing with a life insurance policy that has outlived its purpose.
People like you and me pay our life insurance premiums each year to protect our loved ones or business partners. But let’s be real, this is a policy we hope doesn’t get used anytime soon. If we’re lucky, we actually outlive the need for our life insurance policies. But what happens when:
- This policy that you have been paying for is no longer needed, or you just can’t afford the often-rising premiums?
- Your children are no longer dependents, and you’ve built up enough wealth to make sure your family is taken care of for the rest of their lives?
- You and your business partner have sold your company, and the insurance policies you had in place to protect each other, and your families are no longer wanted?
- Then there are all the families who purchased policies to cover the expected estate taxes upon the second spouse’s passing, and now federal exemptions have increased so much that fewer than one percent of Americans will even have a federal estate tax.
These are just some of a slew of potential situations where life insurance had a pivotal role in significantly leveraging money to provide security and peace of mind, but now the need for such coverage has diminished or evaporated altogether. Most people believe they have only three options for their now unwanted and unneeded life insurance policies. They include:
- Keep the policy and continue paying the increased premiums.
- Decrease the death benefit of the policy to maintain an affordable premium.
- Let the policy lapse and receive any potential cash value that has accumulated if it’s a permanent policy.
What if there was a fourth option that might benefit you much more? Would you like to learn how you could potentially profit from the sale of your life insurance policy? We’re going to introduce you to a strategy that insurance companies do not want you to know about. We feel you should be in the know about a relatively unknown yet powerful option: Life settlements!
Your home, automobiles, boat, investment portfolios, investment real estate and business interests are all considered capital assets. However, most people aren’t aware that your life insurance policies are also considered a capital asset — an asset that may have significant value.
How can this be? I hear you asking yourself. The answer starts with getting acquainted with what a life settlement is.
So, What Is a Life Settlement?
A life settlement is the sale of an existing life insurance policy, often to a third-party institutional investor. These investors on what we call the “secondary” market often include pension funds, hedge funds or banks. The policy is put up for sale for more than its cash surrender value and less than its death benefit. In such a transaction, the policy owner sells the policy in exchange for a lump sum cash payment. The policy owner is often the insured but can also include entities such as businesses or an irrevocable life insurance trust. Once the policy is sold to the institutional investor, they become the policy’s owner. It is now their responsibility to make all the premium payments moving forward. In return, they will eventually receive the death benefit upon the insured’s death.
These institutional investors purchase many different life insurance policies to diversify their holdings. It is helpful to know that the purchased policies are owned in large blind pools with many other policies. This helps to assure client confidentiality. In addition, the investors participate in the performance of the grouping of numerous policies similar to a mutual fund portfolio where the investors are less concerned about each individual equity holding they own and more focused on the overall performance of their pool of assets. Even though the institutional investors who purchase unwanted policies DO NOT have access to an insured’s personal information, reputable companies service these portfolios and keep confidential records of the names and contact information needed to track an insured’s health.
What’s In It for You or Your Client?
The bottom line is that unneeded and sometimes financially burdensome life insurance policies can often be sold for a heck of a lot more than you would get by simply letting them go. Of course, like most major financial transactions, this should only be considered after a thorough analysis of the pros and cons of retaining the policy vs. selling or surrendering it. But suppose a life insurance policy is no longer necessary. In that case, a life settlement could result in the policy owner receiving a more significant amount than if the policy were allowed to lapse or was surrendered for its cash surrender value.
The most effective way to get you in the know on life settlements is to share actual case studies. As we share these informative stories that may surprise you, it is important to know the following:
- All client names have been changed to protect confidentiality.
- The gross offer we procure for our clients is always reduced by commissions and expenses related to the sale.
- Each client’s experience varies, and there is no guarantee that a life settlement will generate an offer greater than the current cash surrender value. In such cases, the client can always surrender their policy to the carrier if the coverage is no longer needed.
- This material is intended for informational purposes only and should not be construed as legal or tax advice or investment recommendations. Please consult a qualified attorney, tax advisor, investment professional or insurance agent about the issues discussed herein.
Okay, so now that we’re done with all that, let’s meet some people who, with a little (or a lot of) help from our Valmark Financial Group team, have made life settlements work for them.
Larry and Liz Jacobs were household names in Depoe Bay, Oregon Coast with the world’s smallest navigable harbor. Picture perfect, especially when it’s not raining which is not very often, it’s best known for its whale watching. Larry and Liz were visionaries on that front, starting the first whale watching tour company in 1968. Liz worked in the office taking reservations, selling tickets and keeping the books organized while Larry led three to four daily tours. As the summer ended each year, the whales would slowly work their way back to Mexico just like many retired Oregon residents do. This timing worked out perfectly for Larry as it was also the off-season at the Bandon Dunes Golf Course, world famous for its Scottish-like grassy dunes that roll adjacent to the untamed and rugged Oregon coast. It also meant greens fees of $70 versus the steep $395 fare in the high season.
Sadly, when Liz died unexpectedly of health complications in 2012, Larry’s spirit diminished as his visions of retirement were permanently altered. His heart was no longer in the business. He ended up selling it to a previous employee and not making as much money as he had hoped for. Today, Larry is 88. He had two life insurance policies that he originally purchased to help offset the inevitable estate taxes after he and Liz had both passed. Estate planning was an important topic for Larry and Liz as their goal was to transfer their combined assets to their two children in the most efficient way possible. Although not averse to paying their fair share of taxes, they just didn’t want Uncle Sam to become their primary beneficiary. Back in 2012, the personal federal estate tax exemption amount was $5.12 million. This meant that when someone died and the value of their estate was calculated, any amount more than $5.12 million was subject to the federal estate tax. To make matters worse, Oregon is one of a small handful of states that has a death tax as well.
Jump ahead to 2022 and the personal federal estate tax exemption has increased to $12.06 million, meaning that less than 1 percent of Americans currently have a federally taxable estate. That has changed the picture for Larry, who feels there is no longer a need for this coverage which included one Universal Life policy for $1.2 million and another policy for $400,000. In addition, now that he was older, the premiums he had been paying for years would no longer buy the same amount of coverage. If he wanted to continue to fund his policies to age 100 at the same guaranteed level, he would have to pay more. A lot more. Even though his life expectancy was under five years, Larry was adamant about not paying the increased premiums the insurance company demanded. He would rather use this money to play Bandon Dunes during the peak season on a scarce warm and sunny day. Understanding Larry’s wishes, his financial advisor in nearby Newport, Oregon introduced him to the concept of a life settlement and referred him to our team. Working with multiple providers to negotiate settlement offers through an auction process, we were able to procure a gross offer of $975,000. This was not only 60 percent of Larry’s total death benefit, but $842,000 more than his total cash surrender value of $133,000. He was thrilled to no longer pay his annual premiums of $133,000 and he even purchased a golf cart resembling a Mercedes Benz. Talk about golfing in style!
An All-Too-Often Unknown Option
In most states, insurance carriers are not required to tell the owners of life insurance policies that they have the option to sell their policy instead of lapsing or surrendering them. Therefore, it’s the financial advisor’s responsibility to educate clients regarding the life settlement option. Unfortunately, most policyholders, insurance agents, financial planners, CPAs and estate planning attorneys we have come across have been unaware of such solutions for unwanted life insurance policies. Not surprisingly, studies show that more than 50 percent of seniors had no idea they could sell their policies. Of those, nearly 90 percent who lapsed or surrendered their policies back to insurance carriers would have considered selling the policy had they known that life settlements existed. Luckily, Larry was introduced to us before he surrendered her policy.
David Rosell is president of Rosell Wealth Management in Bend. RosellWealthManagement.com. He is the host of Recession-Proof Your Retirement Podcast and author of Failure is Not an Option — Creating Certainty in the Uncertainty of Retirement and Keep Climbing — A Millennial’s Guide to Financial Planning. Find David’s books at local bookstores, Amazon, Audible as well as the Redmond Airport.
Investment advisory services offered through Valmark Advisers, Inc. an SEC Registered Investment Advisor Securities offered through Valmark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste. 300 Akron, Ohio 44333-2431. 800-765-5201. Rosell Wealth Management is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.
Valmark Securities supervises all life settlements like a security transaction and its’ registered representatives act as brokers on the transaction and may receive a fee from the purchaser. Once a policy is transferred, the policy owner has no control over subsequent transfers and may be required to disclosure additional information later. If a continued need for coverage exists, the policy owner should consider the availability, adequacy and cost of the comparable coverage. A life settlement transaction may require an extended period to complete and result in higher costs and fees due to their complexity. Policy owners considering the need for cash should consider other less costly alternatives. A life settlement may affect the insured’s ability to obtain insurance in the future and the seller’s eligibility for certain public assistance programs. When an individual decides to sell their policy, they must provide complete access to their medical history, and other personal information.
