(Photo | Courtesy of Rosell Wealth Management)
Coincidence. Destiny. Karma. Luck. Fate. Good fortune. These words all describe the opportunity presented in this article and it just might be your ticket to ride. However, the word that I think best describes it all is serendipity. It’s one of my favorite words that means: luck that takes the form of finding valuable or pleasant things that are not looked for. This has been a favorite word of mine since I first learned about it through the writings of Dr. Wayne Dyer in the late 1980s. Life certainly has its ups and downs for everyone. While I’m no exception, so much of my life has been guided by unexpected, good happenings.
Over the years, I have learned that experiencing serendipity may have a lot to do with being in the right place at the right time. However, I believe many more of these opportune events happen because of attitude, deliberate creation, the Law of Attraction and taking action.
Is This Your Chance?
All too often, especially when life gets in the way, we don’t see opportunities that are right in front of us. So, what if I told you that something you don’t think you want anymore and have assumed is worthless could potentially be worth some serious cash? In this article, part II from last month’s column on Life Settlements, I’ll explain how you can turn a unnecessary and often expensive life insurance policy into the kind of money that could redefine your golden years. My business partner, Rodney Cook and I are currently writing a book on this very subject that will be released this summer. It’s titled In The Know — How to Profit From Your Unwanted Life Insurance Policy. Here’s a few excerpts from our book to better explain this financial strategy.
We are firm believers in the power of life insurance. However, there are times when the policy you purchased years ago is no longer wanted or needed. 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!
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 called a provider. In such a transaction, the policy owner sells the policy in exchange for a lump sum cash payment. 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.
Are You a Potential Life Settlement Candidate?
Here are the prerequisites:
- The insured’s age is 65 and older
- Their life expectancy is 15 years or less
- There has been a decline in health from the original policy issue
- The life insurance policy has a net death benefit of $250,000 or more (there’s no maximum)
- The policy owner can be an individual, trust, or corporation
- The annual premium should be five percent of the death benefit (or less), and the cash surrender value should be 15 percent of the death benefit (or less).
A settlement is only possible when the policy’s market value exceeds the cash surrender value. Key factors in determining the market value of a policy are the death benefit, the cost of future premiums and the insured’s life expectancy. As you might imagine, even though it’s tough to think about, life expectancy is the key component in determining the market value of a life settlement transaction. The lower the premiums and the shorter the life expectancy, the higher the selling price. Conversely, the greater the amount of premiums that need to be paid and the longer the investor must wait for the death benefit, the lower the policy value. Let’s flip that notion around and look on the positive side. If you don’t need the life insurance policy, it can really feather your nest during this chapter of your life.
Missed Life Settlement Opportunities
If you’re the owner of a life insurance policy that’s no longer required or wanted but aren’t sure what to do about that, you’re not alone. Unfortunately, as you now know, more than half of all seniors have no idea they might be able to sell their life insurance policies. That potentially explains why each year, more than $112 billion in life insurance (face value) is allowed to lapse or is surrendered by individuals over age 65, a trend that will continue through 2027. That’s $120 billion with a “b!”¹ That only partially explains why so many people are walking away from the profit they could potentially collect from a life settlement.
Enter life insurance companies, who make far less money when they have to pay out a death benefit than when a policy is allowed to lapse or when it’s surrendered. But, of course, that’s in all likelihood not going to happen if that policy is sold to an investor. As a result, insurance companies don’t exactly make it easy to attain a life settlement. Not only do they refrain from explaining the life-settlement option to policy owners (even threatening to fire those sales agents who do mention it), they lobby for state laws that could restrict or even shut down the life settlement market.
But that’s far from the only impediment. The more significant issue gets back to plain old lack of knowledge. As we’ve seen, not only do policy owners not realize that they can potentially sell those unwanted life insurance policies, but their financial advisors don’t realize this either.
Luckily, that wasn’t the case for Alan Baxter. 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.
Alan Baxter is one of those who, rather than surrender the policy and wind up with less than he might have — or nothing at all — was able to profit significantly. Alan, who has always had a passion for skiing — racing at Mt. Hood in high school, working as a volunteer race coach after graduating college and attending the Winter Olympics whenever possible to see the downhill events — purchased a $2 million term policy 14 years ago to cover survivor needs for his children who were minors at that time. However, his two sons are now successful professionals in their mid-30s — one a fashion designer at Columbia Sportswear and the other a nurse at Providence Healthcare — and the end of the policy’s 15-year term period was nearing.
Although Alan’s first marriage ended in divorce, he is happily remarried to Kate, who has stuck by him despite challenges that could have destroyed flimsier relationships. In 2008, Alan’s love for speed caught up with him—not on skis but behind the wheel of his beloved 1997 Porche 930. He had trailered his race car up to Portland International Raceway (PIR), just as he did several times each summer. As usual, he and his friend Roger had entered their cars into a race sanctioned by the Sports Car Club of America (SCCA), a non-profit automobile club formed in 1944 that runs programs for amateur racing enthusiasts. This would be their first race since the track’s recent and extensive renovation, which included repaving as well as widening turns four through seven and sharpening others to slow down racers before they entered the back straight. Excited to try out the “upgraded” track, Alan pushed his mean machine hard. Although the course is almost perfectly flat, the track configuration includes a hard chicane at the end of the front straightaway. Coming into it with too much speed and not enough downshifting or braking action, he hit the new guardrail at over 150 mph. When he awoke at OHSU Spinal Center, he had no memory of the accident. Moments later, the doctor shared the news that Alan was now paralyzed from the waist down.
Although only 66, Alan, who is expected to live for just another four to seven more years, had to reevaluate many things, including his financial situation. When he expressed reservations about continuing to pay for or renewing his term policy since his kids, who were the only beneficiaries, were doing fine on their own, the accountant suggested that life settlement specialists review his policy. During the meeting, Alan was surprised to learn that rather than lapsing his term policy, which had no cash value, or paying more than $45,000 to convert the policy to a permanent policy, he could, instead, sell the term policy on the secondary market and recoup the $63,000 in cumulative premiums he had paid on the policy as well as additional funds to further enjoy his remaining years.
In the end, a bidding process and negotiated settlement offer brought in a total gross offer of $980,000, $917,000 more than he had paid in term premiums. Talk about creating value on an asset that so many people would assume was worthless! Even though I’ve been studying this whole situation for a while, as well as working up and reviewing financial plans for all our clients, we can’t help being amazed at how many people continue to pay for costly insurance policies they don’t need. And it’s downright disconcerting when you consider the potential upside of selling those policies.
Do you have a life insurance policy that you may not want or need anymore? Visit our website at RosellWealthManagement.com to begin a dialog to help determine if this is a viable option for you. At Rosell wealth management our team specializes in helping our clients create a plan that helps them live their dream retirement with peace of mind.
¹Valmark Securities, Creating Value out of an Existing Life Insurance Policy’ brochure
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.