What to do when your clients need the money … not the insurance?

“Advisors should never allow clients to surrender a permanent life insurance policy or let a convertible term policy lapse before looking into a life settlement,” cautions Judith Maurer, Founder of LLIS. Why? Because there may be value hidden in the policy that could change your client’s life.

What is a life settlement (LS)?

It’s the sale of a life insurance policy that’s no longer needed or wanted by the policy owner and beneficiaries. Both convertible term policies and cash value policies are eligible for life settlements. They work as an insurance planning tool because a policy is a contract and may be bought and sold.

But you probably haven't heard much about life settlements recently. That’s because the life settlement market came to a virtual standstill in 2009. Improved life expectancies made it harder to sell a policy unless the insured person was very old or very sick. And there simply wasn’t money available in the secondary market to spend on unwanted policies. But the institutional funds that buy policies have recently had large capital infusions and are aggressively increasing prices for old policies. Life settlements are back!

Here is the story of how LLIS recently helped one advisor’s client:

An advisor came to us with a 59-year-old male client who was going to drop a policy; he had other insurance coverage, was ill, and figured he just didn’t need it anymore. Underwriters determined his life expectancy to be between 36 and 51 months. His policy was convertible term insurance (meaning it had an option to convert the term coverage to permanent coverage) with a death benefit of $2 million. We reviewed several options with him and his advisor, he decided to proceed with the sale, and he ended up with a net amount after commissions of $1,165,600. The life settlement allowed him to enjoy watching his heirs spend their gifts while he was still alive.

I can hear you now: “Did I just read commissions? I thought LLIS team members didn’t take commissions?”

We, as team members, don’t. We’re all salaried. LLIS, as a company, does receive commission on traditional policies, but not on low-load policies (which we recommend any time they are available). Because of our low-load business model, we negotiate our fully-disclosed compensation with the funder on each transaction. Your clients should always receive more value for their policy working with LLIS than through a traditional broker. Fees will vary based on the complexity of the case.

How it works

You may wonder what the life settlement process looks like. Well, it starts off with a limited number of life insurance agents who must be approved to engage in the LS business, and some states require special endorsements to insurance licenses. Judith Maurer, founder of LLIS, has that approval and gets the licenses as needed for your clients. Since LLIS provides these services only for fee-only financial advisors and their clients, our process may be a bit different than others. Here’s a typical LLIS life settlement process:

• We pre-qualify your client, which usually means he or she is older, has a life expectancy of less than 10 years, and the policy’s face amount is at least $500,000. Universal life, convertible term, and survivorship life (with one insured already deceased) are the most attractive to funders.
• LLIS works with firms that represent institutionally-funded companies with established, consistent business practices to ensure that all LS submissions are in compliance with individual state regulations, FINRA, and NAIC recommended procedures. Consequently, life settlements are not available in all states.
• We get a preliminary valuation using policy details, in-force illustrations, health information, and a copy of any life insurance trust documents from your client. The policy owner must cooperate in this detailed process.
• If the policy qualifies and the policy owner agrees to proceed, the underwriter calculates the insured’s life expectancy (which allows the broker to more accurately predict offers for the policy) and orders medical records (contrary to conventional wisdom, no medical exam is required).
• If all parties agree to proceed, the broker sends the policy to auction. When the bidding closes, you and your client once again confer to decide whether or not to proceed with the sale.
• If the offer is accepted, all parties sign closing documents. A LS through LLIS is completely transparent; the seller receives a transaction summary that discloses all compensation.
• The funder submits change of ownership and beneficiary forms to the life insurance company; and simultaneously puts the agreed upon amount into an escrow account until confirmation from the insurance company that it officially owns the policy.
• The money is released to your client.

More client stories

If you’re thinking life settlements almost never work, here are a few other LLIS-facilitated examples for you:

Male age 76 wanted to make a donation to build a building at a private school.

• He was able to sell his $1 million UL policy for $510,000 and watch the construction begin.

Male age 73 with a terminal illness diagnosis and a $250,000 UL policy.

• Widower with no strong legacy goals received $86,000 and bought a convertible to make the drive of a lifetime down the California coast.

Male age 69 sold a $50,000 whole life policy with a $200,000 term rider for $32,000.

• The term rider premiums increased to more than what he could afford in retirement so he recovered the premiums paid.

Female age 71 with both cognitive and physical impairments.

• Her daughter (who couldn’t afford the premiums) sold the $600,000 policy for $54,000 to help pay for her mother’s home health care instead of continuing the premium obligations.

Male age 67 with business loans and a desire to retire.

• Sold three policies with a total face amount of $1 million for enough to pay off his loans ($257,750).

Female age 81 in good health planned to surrender her $1million UL policy for less than $10,000.

• Her children (the beneficiaries) were happy to let her sell it for $78,000 to pay fees in her nice assisted living facility.

What else is there?

There are other options available to clients who have policies they no longer want or need if:

• The policy has cash values (CV). They could transfer the CV tax-free to a no-load annuity under a 1035 exchange and use the money later to supplement income.
• The insured is very unhealthy. The heirs can take over ownership of the policy, pay premiums, and make themselves irrevocable beneficiaries of the policy.
• An accelerated death benefit/terminal illness rider is available on the policy. If the insured is terminally ill, it may be possible to initiate a prepayment of death benefit to the policy owner or anyone the owner designates. These riders vary among states and insurance companies.
• A term policy is nearing its conversion expiration date and the insured is very ill (death is imminent). The policy can be converted during the last 30 days of the policy. Insurance companies typically provide a conversion illustration -- when expiration is near -- showing premiums to carry the policy to maturity. If your client’s life expectancy is much earlier than the policy’s maturity, the insurance company can illustrate premiums that carry the policy for just 10 years. If your client is still alive then, it can be recalculated in the 10^th year. There is no reason to pay endowment premiums (premiums that last until the policy’s date of maturity) when life expectancy is short.
• They think they may need part of the death benefit, but not all. Some funders will contract to pay part of the death benefit to heirs under an arrangement called a retained death benefit. Of course, this reduces the amount the policy owner receives, but your client has the assurance that heirs receive some death benefit at claim time.

Taxation and life settlements

The sale of a life insurance policy may be a taxable event. Advisors and their clients should seek tax advice regarding their individual circumstances.

Want to know more?

There are a couple of websites I recommend for advisors to learn more:

FINRA: http://www.finra.org/investors/alerts/seniors-beware-what-you-should-know-about-life-settlements

Life Insurance Settlement Association (LISA): www.LISA.org

Judith Maurer has been facilitating life settlements since 1998. She’s available to consult with you and your clients. A quick call can determine if a life settlement is even a possibility for a client. You can reach her at: 877-254-4429 and judithmaurer@LLIS.com.