A popular narrative in mainstream news media coverage is that the lack of planning for individuals approaching retirement is pointing the way to a serious national problem. Health care and other costs are on the rise and many seniors are in a state of uncertainty. For many, a state of panic sets in when they realize their resources may not be enough to pay for the comfortable retirement years they once envisioned.

As one of the most overlooked assets in an individual’s investment portfolio, a life insurance policy is often not utilized to its full potential. Why? Because many individuals do not know this asset creates liquidity options. People more generally make the decision to surrender the policy, allow it to lapse, roll it into a paid-up policy, or reduce the death benefit to save premiums.

But what about a life settlement?

Many seniors are not aware that a life insurance policy is personal property and may be sold as a life settlement for a value substantially greater than its cash surrender value. As a result, billions of dollars (face value) of policies that are no longer needed, wanted or affordable are lapsed and surrendered back to life insurance carriers by seniors who might have sold them for a cash payment. According to the Government Accountability Office (GAO) study on life settlements, the number of policyholders who “life settled” their policies received up to seven times the value of a lapsed or surrendered policy. This represents hundreds of millions of dollars in value not given back to insurance carriers.

Studies show that nearly 80 percent of baby boomers and seniors are interested in life settlements as a means to supplement retirement finances. 

So, let’s talk about a senior’s right to know about life settlements. Specifically, they should have a right to know there are other options to consider before lapsing or surrendering a policy.  Six states – Kentucky, Maine, New Hampshire, Oregon, Washington and Wisconsin – have already passed various versions of a life insurance disclosure requirement, thereby requiring insurance carriers to notify seniors, in certain circumstances, of the alternatives to lapse or surrender their policy. These alternatives may include options such as:

– accelerated death benefit or available riders

– assignment of policy as a gift

– life settlement

– policy replacement

– maintenance pursuant to terms or riders

– maintenance of policy through a loan

– conversion of term to a permanent policy

– conversion of long-term care insurance or a long-term care benefit plan

A reasonable question may be: who has this obligation to inform? All those, in some capacity, serving as insurance advisors to seniors need to know about the options available for policies that may be used as a financial resource. It is about educating and informing to help people evaluate their options.

Life insurance companies should also join in the effort to inform and educate policyholders of their rights and options for the policies they sold to a consumer in the first place.

An ongoing case in California, Larry Grill, et al. v. Lincoln National Life Insurance Company, illustrates an example of the potential liability for a life carrier who did not inform the policyholder of all the options available for a policy that was no longer affordable. While the outcome of the case is pending, the primary message is that a policyholder who buys a life insurance policy should be informed by that carrier about the options available to them if there comes a time when the policy is no longer needed, wanted or affordable.

It’s understandable why insurance carriers are concerned about the impact of lapse rates on their profitability, but they have a moral obligation to do what is in the best interest of those who invest significant amounts of their life resources in their life insurance products. Seniors do have a right to know; it’s a collective obligation to inform and educate policyholders about the potential value available to them and the alternatives to lapsing a policy.

This article is for informational purposes only.