(Photo courtesy of Rosell Wealth Management)
Would you like to learn about a retirement strategy that most people, including advisors, are not aware of? I have guided many people into a successful retirement over the past two decades here in Central Oregon and I always seem to get the most excitement from what I’m going to share with you in this brief column. A staggering 92 percent of life insurance policies never pay out death benefits. Instead, they expire, lapse, or are surrendered before then. Had all those policyholders known about life settlements, they wouldn’t have lost all those dollars. Research shows that, in hindsight, 90 percent of seniors would have considered a life insurance option had they known about it.(1)
Hindsight, as they say, is 20-20. And while it doesn’t help the people who could have sold their life insurance policies, it can help you or your clients. Unfortunately, most people are not in the know. While life settlement transactions in the marketplace grew by 11 percent in 2020(2), with 3,241 people selling their life insurance policies for a combined total of more than $848 million, data in 2018 showed that 90 percent of consumers have no knowledge of life settlements.(3) I still believe that to be the case. Luckily, this will no longer the case for you after reading this CBN column.
People like us pay our life insurance premiums each year to protect our loved ones or business partners. I’m a true proponent of life insurance. But let’s be real, this is a policy you hope doesn’t get used anytime soon. If you’re lucky, you will outlive the need for your life insurance policy. 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?
- You purchased policies to cover the expected estate taxes upon the second spouse’s passing, and now federal exemptions have increased so much that only 0.1 percent of Americans will have to pay a federal estate tax.(4)
These are just some of a slew of potential situations where life insurance played 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 or your client much more? I’m going to introduce you to a strategy that insurance companies do not want you to know about. I feel you should be in the know about a relatively unknown yet powerful option: life settlements. Your home, automobile, boat, investment portfolio, 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.
The most effective way to get you in the know on this is to share actual case studies. Although all the financial details in this story use exact numbers, the names of the individuals and details about their lives have been changed to protect their privacy. The numbers associated to this case and many others are quite impressive and it is important to know that the gross offer we procure for our clients is always reduced by commissions and expenses related to the sale.
Okay, so now that we’re done with all that, let’s meet Larry and Liz, with a little (or a lot of) help from our Valmark Financial Group team, have made life settlements work for them.
Playing with Priorities
Larry and Liz were household names in Depoe Bay, a town of fewer than 1,600 people located on the rugged Oregon Coast with the world’s smallest navigable harbor. Picture-perfect especially when it’s not raining (which is not very often), the seaside resort is best known for its whale watching. Larry and Liz were visionaries on that front, starting the first whale-watching tour company in 1968.
Although one’s chances for seeing whales year-round along the Oregon Coast are high, resident whales come close to shore to feed from June to mid-November. Depoe Bay is a hot spot for these giants of the sea looking for food at this time of year, which makes them very easy to spot. During this same time period, Larry and Liz would barely have time to come up for air. Liz worked in the office taking reservations, selling tickets, and keeping the books organized while Larry and his best friend Otto led three to four daily tours. Otto, their 28-pound Corgi, loved the ocean. Despite his short stubby legs, he was always able to get up on the boat on his own and always looked “happy to be here” thanks to an infectious doggy smile. Smart, affectionate, and long, this working dog always needed a job to do. On the boat, his primary role was entertaining the paying guests while somehow receiving almost as much attention as the whales.
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 well. Suddenly, his visions of retirement had become permanently altered; his heart was no longer in his work. He ended up selling the business to a previous employee and not making as much money as he had hoped for.
Larry, now 88, 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 them 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.(5) 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 2023 and the personal federal estate tax exemption has increased to $12.92 million(6), meaning that less than one 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 less than five years, Larry was adamant about not paying the increased premiums the insurance company demanded. He preferred to use this money to visit Bandon Dunes during the peak season, on a scarce warm and sunny day, as he could still hit balls on their range.
Understanding Larry’s wishes, his financial advisor 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!
(5/6)irs.gov/businesses/small-businesses-self-employed/estate-tax
David Rosell is president of Rosell Wealth Management in Bend. RosellWealthManagement.com. He is the co-author of the recently released book: In The Know-Turning Your Unneeded Life Insurance Policy Into Serious Cash. 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.
