Retirement is more expensive than it used to be. Seniors today live longer and spend more on healthcare than any other generation. Today’s seniors are also largely underfunded. A 2020 TD Ameritrade report concludes that 33% of seniors aged 70 to 79 have less than $100,000 in their savings. Those aged 60 to 69 are even worse off, with 38% having less than $100,000 saved. In that context, the life settlements may be an increasingly popular solution to help cash-strapped seniors. A life settlement is the sale of a life insurance policy to a third-party investor for cash.
Life settlements have become more popular in recent years, even as false or misleading information about them circulates among broker-dealers and insurance policyholders. There are a few factors driving the spread of misinformation. For one, the life settlement industry is fairly young. And while these transactions are regulated in most states, the exact regulations can vary from state to state. Secondly, life insurance companies have shown resistance to the ongoing growth of the life settlement industry. While there is a perspective that life settlements actually benefits insurer by making their product more valuable, not everyone sees it this way. The opposing view is that insurers profit more on a surrendered policy than on a life settlement.
The rumors, misinformation, and myths about life settlements won’t prevent the industry from growing. But they could financially harm seniors. Would-be policy sellers, for example, may hold off on a life settlement because they’re confused about how it would work. Or, worse, they may disregard their life insurance as a source of cash because they’ve heard “facts” that are simply untrue.
If you are a senior who’s interested in liquidating your life insurance, you should know the real truth about life settlements. That’s the only way you can make an informed decision on whether a life settlement is right for you. A good first step is to review our breakdown of the five most common life settlement myths below. If you’ve ever discussed life settlements with a broker dealer, you’ve may have heard one of two already.
Myth #1: Life settlements are not legal or regulated
Fact: Life settlements are both legal and regulated. The legality of selling life insurance was established in the early 20th-century when the Supreme Court ruled on Grigsby v. Russell. Grigsby was a physician who purchased a life insurance policy from his patient, John C. Burchard. Burchard needed an operation but didn’t have the funds to pay for it. He offered to sell Grigsby his life insurance as payment. Grigsby paid Burchard $100, performed the operation, and then assumed responsibility for the policy’s premium payments.
Later, after Burchard had passed, the executor of Burchard’s estate disputed the transaction, arguing that the death benefit should have been paid to Burchard’s estate and not to Grigsby. The Supreme Court ruled squarely in favor of Grigsby, stating that life insurance is an asset and, therefore, can be legally sold to another party.
Today, life settlements are regulated in 43 states. Those regulations commonly cover disclosures, accepted business and advertising practices, licensing of settlement providers and brokers, and life settlement contract language. These statutes are largely designed to protect policyholders, agents, brokers, and insurance companies from fraud.
Myth #2: Life settlements are only for terminally ill individuals
Fact: You do not need to be terminally or chronically ill to sell your life insurance in a life settlement. The primary requirements for a life settlement are that you are at least 70 years old and your policy is valued at $50,000 or more.
The broker-dealer who says you have to be terminally ill to sell your insurance is likely confusing the life settlement with a viatical settlement. While life settlements and viatical settlements are similar, there are some important distinctions between these two transactions. For one, viatical settlements close much more quickly than life settlements. A life settlement might take one to three months to complete, while the viatical settlement process only takes a few weeks. These are expedited because the policyholders generally needs the funds right away.
Taxation rules for viatical settlements vs. life settlements differ as well. Viatical settlement proceeds are usually not taxable, while a portion of life settlement proceeds can be taxable.
Myth #3: There are rules on how people can spend money from a life settlement
Fact: There are no rules on how you spend the proceeds from a life settlement. The money is yours to use as you wish. You could, for example:
- Pay down debt. If your debt is strangling your fixed-income budget, use your life settlement proceeds to pay off credit card debts or even a mortgage.
- Pay for healthcare, nursing home care, etc. Many seniors are motivated to sell their life insurance to free up cash for healthcare and related services.
- Fund your living expenses. Even if debt isn’t a problem, an influx of cash can help with daily living expenses over time.
- Create an emergency fund. A healthy emergency fund allows seniors to manage through unexpected expenses without increasing their retirement distributions. The challenge many seniors face, however, is refunding cash savings once it has to be used for something. A life settlement could easily solve that issue.
- Invest the proceeds for dividend income. Life settlement proceeds can also be invested for future dividend income.
- Spend the money on vacations or upgrade your lifestyle. Yes, you can use your life settlement proceeds to take a trip around the world or to buy an RV.
Myth #4: People can get more money by surrendering their policy
This may be the most damaging life settlement myth of all. Unfortunately, too many broker dealers repeat this myth — either because they believe it or because they don’t want you to know that the opposite is true.
Fact: Life settlements generate more cash than life insurance surrenders. In fact, you may be able to get up to 60% of your death benefit by way of a life settlement. This makes sense; the only reason the life settlement industry exists is because investors are willing to pay more than surrender value for your life insurance. Few policyholders would logically choose a life settlement if a surrender was more lucrative.
You can also debunk this myth yourself. Contact your life insurance company and ask what your policy’s current surrender value is — without committing to anything. Then, contact Harbor Life Settlements and get a free, no-obligation estimate on your policy’s market value. Compare the two numbers and decide for yourself.
Myth #5: You have to be a life insurance expert to offer life settlements to clients
Many financial and legal advisors today just aren’t that familiar with life settlements. Because they lack experience with and exposure to these transactions, they may feel uncomfortable discussing them with clients. The real truth is that your advisor doesn’t have to be an expert in life settlements. His or her knowledge can be limited to the understanding that life insurance can be sold to a third-party for more than the policy’s cash surrender value. The advisor who masters that concept can easily recognize when it might be time to mention life settlements, such as:
- When a client wants to surrender a policy
- When a client needs cash, but doesn’t have other sellable assets
- When a client no longer wants to pay life insurance premiums
Advisors who don’t feel comfortable explaining life settlements to a client can easily loop in the Harbor Life Settlements team to lead that discussion. Harbor Life Settlements can also provide a free, no-obligation estimate for the policy’s value — information the client would need before deciding if a life settlement is the right move anyway.
If you or a client has a life insurance policy that’s no longer needed, choose to deal in facts instead of myths. Contact our team today to find out what that policy is really worth.