Life Settlements are Quickly Becoming a Mainstream Financial Option
Americans are living longer than ever before. This is great news for those who can afford it, but bad news if you’re a baby boomer facing mounting debt and dwindling savings.
The Stanford Center for Longevity reports that baby boomers hold less wealth, carry more debt and will face greater expenses than retirees a decade older than them. And considering that there are more than 71.5 million baby boomers living in the U.S., the number of individuals who could run out of money in old age is staggering. So, what options do boomers have?
An Option Unknown To Many
Through my 22 years in the insurance industry, I’ve found that most people are unaware of an option available to life insurance policy owners. Individuals who own life insurance can sell their policy to reclaim equity and provide funding for their golden years. A life settlement, as it’s known, can help cover medical expenses, long-term care or any financial expenses faced by the policyowner. But unfortunately, most policies lapse or are surrendered without the owner benefiting.
According to a 2018 study by investment management firm Conning, $200 billion worth of life insurance will lapse or be surrendered each year through 2027 — all of which could qualify for a life settlement and be pocketed by the policyowner. And, according to research from the London Business School, a life settlement pays policyowners an average of over four times the policy’s cash surrender value.
Let’s also consider the following statistic: 88% of all universal life policies that are issued are lapsed or surrendered — without payment of a death benefit — because policyholders no longer want or need their policies, or they can no longer afford them. That’s where life settlements can play a pivotal role.
Why Are Life Settlements Becoming A Mainstream Financial Option?
Besides the details above, the following explains why life settlements are becoming a mainstream financial option for retirees:
• The pandemic’s impact on jobs and retirement accounts: The recent COVID-19 pandemic has hit retirement accounts hard and caused millions to lose their jobs. Many of these workers are seniors who have had to continue working due to the senior retirement gap. Life settlements can be a source of urgently needed funds.
• The new, higher estate tax exemption: In 2017, the estate tax exemption increased to $5.5 million. In 2018, it skyrocketed to $11.18 million for singles and $22.4 million for married couples. This means policyowners who bought life insurance to pay estate taxes might no longer need the policies because they no longer have an estate tax issue.
• COI increases by carriers: Because interest rates remain at historic lows, carriers are unable to make money the way they used to from investments. To make up for it, many carriers have increased their cost of insurance (COI) charges to customers. An option for policyowners to avoid increased COI charges in their premiums is to sell their policies.
• Comfortable regulatory environment: 43 states and Puerto Rico have life settlement laws that provide substantial consumer protections in the sale of a life insurance policy. Nine states require carriers to disclose that there are alternatives to the lapse or surrender of a life insurance policy when a policy is in jeopardy of lapsing, which includes the life settlement option. Additionally, in 2019, the National Conference of Insurance Legislators reaffirmed its commitment to making sure policyholders were informed of life settlement as an option. Even the National Association of Insurance Commissioners, the watchdog of the life insurance industry, has endorsed life settlements as a way for seniors to finance their long-term care costs and other expenses.
• Baby boomers holding large amounts of life insurance: About 60% of Americans were covered by some type of life insurance in 2018. The value of total life insurance coverage in the U.S. was roughly $19.6 trillion at the end of 2018.
What To Consider When Pursuing A Life Settlement
The biggest thing to consider when determining if selling your policy is right for you is whether you need the coverage. If someone needs their life insurance coverage and can afford it, they shouldn’t sell it. Life settlements are for people who either no longer want or need their coverage or simply cannot afford it any longer.
Another important thing sellers should be aware of is that when you search for a life settlement company, there are brokers, and there are buyers. It can be hard to tell the difference. Often, you will need to ask the company which they are. A buyer is self-explanatory, while a broker is a company that will find you an offer for a fee.
You should also research the background of any company you’re considering working with. A life settlement is a lifelong transaction, so be sure you have checked that company’s legal and regulatory history. Are they a member of the Better Business Bureau with an A+ rating?
An important consideration when going the buyer route is whether they are an institutional buyer. Are they using institutional money from a large life settlement fund with hundreds of other policies in the portfolio? You don’t want a private investor owning a policy on you or your loved one.
The fact that many boomers and seniors will experience financial hardship without knowing such an option is available to them is heartbreaking to say the least. Life settlements represent a safe option to retirees who need money.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
This article was written for Forbes. Find out more here.