Alternatives To Lapsing A Life Insurance Policy

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Nest Eggs       More than 100 years ago, in its landmark, Grigsby v. Russell decision, the U.S. Supreme Court ruled that life insurance is personal property. It can be bought and sold like any other property owned.

This means your life insurance policy has value to you or your family right now, not just when you pass away. Unfortunately, the vast majority of people are unaware of this simple fact.

The problem arises when the policy owner concludes they just can’t afford those premiums anymore, perhaps because they’re now in their retirement years and living on a fixed income. Or maybe they decide they just don’t need the death benefit anymore now that their children are grown, have steady jobs and built families of their own.

So, in the absence of knowledge about any other alternatives, most policy owners in this situation just lapse or surrender the policy back to the insurance company, accepting whatever small amount of cash surrender value is available.

Research available to the Life Insurance Settlement Association indicates that more than 710,000 policies are lapsed or surrendered each year — with a combined face value of more than $57 billion — by American seniors over the age of 70.

It’s important to contact your trusted insurance advisor [since it is their fiduciary responsibility] who can inform you of your options and instill awareness of alternatives to lapsing or surrendering a policy. 

But aside from the fiduciary issue, there is a common-sense test: if a person could lapse a policy for its nominal cash surrender value of $20,000 or able to sell that same policy to an investor for $150,000, they should be entitled to this information.

So, if a person has decided they no longer need or can afford a life insurance policy, what are the alternatives to lapsing the policy and surrendering it back to the insurance company?

Here are the primary options that you should know:

  • Maintain the policy through loans, using the policy or its cash surrender value as collateral;
  • Seek an accelerated death benefit, if possible;
  • Convert the policy to a long-term care health insurance policy, if possible;
  • Assign the policy to someone else as a gift or to a non-profit organization as a charitable contribution;
  • If it is a “term” policy, attempt to convert it to permanent insurance;
  • Reduce the death benefit (a lower “face value”) and the premiums; and
  • Sell the policy to a third-party investor through a life settlement.

As with any financial planning decision, there is no “one size fits all” answer to which of these options is best. The one that makes the most sense for you will depend on the your unique needs and desires as the policy owner — and that is where your trusted advisor, can play an invaluable role to guide you to the wisest decision.

90 percent of seniors who lapse policies without knowing about a life settlement indicated they would have considered that option had they known about it; and that 79 percent feel their advisors should inform them about a life settlement option.

Consider this story: A car dealership owner originally purchased a $488,000 life insurance policy to fund a buy/sell agreement with his business partner. After the business dissolved, his family continued to pay the premiums, but eventually decided the coverage was no longer needed.

He was planning to surrender the policy back to the insurance company for $6,800, then learned he had another option: to sell his policy to a life settlement company for $80,000. That’s more than 10 times what he would have received from the insurance company. The proceeds were divided among his three children, which they used to supplement their income.

If your main motive is to obtain cash in your hands — for retirement needs, health care expenses or simply to invest into other assets — then a life settlement is likely the best alternative. As a life insurance policy owner, when you enter into a life settlement, you can realize an average of seven times the amount of the policy’s cash surrender value, based on an analysis of a 2010 survey by the U.S. Government Accountability Office.

Perhaps that’s why 90 percent of seniors who have lapsed a policy would have considered selling it if they had known a life settlement was an option, according to a survey prepared for the Insurance Studies Institute.

Regardless of what you choose to do, just make sure that you are informed of all options before you lapse that life insurance policy.

 

Life Settlements: Fiction vs. Reality

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Many of us love a good book on a crisp autumn day or sitting on the beach —maybe the latest autobiography, a feel-good novel or a best-selling thriller. Of course, for anyone who enjoys books, we know the difference between fiction and non-fiction.

You may have heard about a new novel released this fall (The Carnage Account by Ben Lieberman) that revolves around a Wall Street financier who purchases life settlements that are based on multimillion-dollar life insurance policies. In the fictional world dreamed up by the author, the villainous lead character in the story covertly buys life insurance policies from people who are in need of funds and then dispatches them with his own bare hands in order to collect the death benefit for his “Carnage Account” fund.

The plot is intriguing and has attracted the interest of some readers, including a reporter for Time who recently wrote an article about life settlements that was based largely on the sensationalist drama portrayed by Lieberman’s novel.

But while novels can be fun to read, it’s important to separate fiction from non-fiction when it comes to the real-world life settlements marketplace. Here are just a few of the stark contrasts between the fiction portrayed in these recent stories and the reality of life settlements:

Fiction:   

Life settlements are common for people of all ages.

Reality:

Candidates for life settlements are typically age 70 or older, unless they have some specific health impairments. Professionals in the life insurance settlement industry are focused on informing and educating seniors about the life settlement option.

Fiction:  

Consumers pursue life settlements in order to get out of debt quickly.

Reality:

There are a variety of life circumstances that may lead someone to be interested in exploring the life settlement option, including: the life insurance policy is no longer needed or wanted; premium payments have become unaffordable; the senior is considering surrender or lapse of the policy; a change in estate planning needs; a change in the family’s financial circumstances; or changes in life circumstances, such as divorce or the sale of a business.

Fiction:  

Life settlements are based on insurance policies with a minimum of $5 million in death benefits.

Reality:

Life settlements are typically an option for seniors with a life insurance policy that has a death benefit (“face value”) of more than $100,000, but may be as low as $50,000. A settlement is possible any time the policy’s face value exceeds the cash surrender value, based on a simple analysis of the death benefit, the annual premium and the life expectancy of the policyholder.

Fiction:  

Individual investors purchase life settlements.

Reality:

As the voice of the life settlements industry, the Life Insurance Settlement Association (LISA) has adopted a position and stated publicly that this marketplace is not appropriate for individual investors acting on their own. The primary buyers of life settlements are institutional investors, such as pension funds, endowments, foundations and private equity funds.

Fiction:  

The life settlements marketplace is the Wild West of high finance.

Reality:

As of 2014, 42 states regulate life settlements, affording approximately 90 percent of the U.S. population protection under comprehensive life settlement laws and regulations. Of this group, 31 states have a statutorily mandated two-year waiting period before one can sell their life insurance policy, while 10 states have five-year waiting periods and one state has a four-year waiting period.

Fiction:  

Life settlements are open transactions where personal information attached to the life insurance policyholder is made public.

Reality:

Privacy of personal information in a life settlement transaction is protected carefully in accordance with federal and state privacy laws. In addition, LISA’s Code of Ethics and Standards of Professional Conduct requires all members to abide by all applicable laws and regulations regarding privacy of information. Seniors who wish to pursue a life settlement should work with life settlement intermediaries who are licensed and required to operate within the strict laws pertaining to procedure, privacy, licensing, disclosure and reporting.

So now if you happen to read The Carnage Account — or chat with someone who has — you may be struck by the far-fetched plot envisioned by the imagination of an author who writes fiction and the reality of a highly regulated marketplace that exists to provide seniors with an important financial planning option to consider in the golden years of their lives.