An owner of a life insurance policy who no longer wants the coverage has three main options. He or she can let the policy lapse, surrender the policy back to the insurance company for its cash surrender value, or sell the policy on the secondary market in a life settlement. Of those three strategies, the life settlement generates the highest cash proceeds. Even so, most U.S. adults aren’t familiar with life settlements, according to the Harbor Life 2020 Life Settlement and Retirement Survey. And that means many life insurance policyholders are sitting on unknown wealth — possibly enough to reshape their finances in a meaningful way.
If you are a life insurance agent, you’re likely to be an early point of contact for the senior who’s considering letting go of his or her life insurance policy. The logical questions you might receive are, “What are my options?” and “How much can I get if I surrender this coverage?” Those questions give you the opportunity to show that policyholder how to unlock a large sum of cash through a life settlement.
Why aren’t life settlements discussed more by agents?
Many life insurance agents resist the topic of life settlements with clients, and there are a few reasons why. Those agents may lack education and training, they may be skeptical of the legality of life settlements, or they may have experienced opposition from life insurance carriers with respect to life settlements.
1. Lack of education and training
The life settlement industry is fairly young and many life insurance agents don’t feel comfortable discussing the topic in-depth with clients. Fortunately, there are solutions. Agents can participate in state-accredited life settlement courses that earn continuing education (CE) credits. 360training.com, for example, has state-specific online courses available for $15. WebCE additionally has CE courses ranging from seven to 15 hours of study, priced at about $20 and up. And CEU Insurance has CE life settlement courses for producers in most states.
2. Legality of life settlements
Life settlements are completely legal. The legal precedent was set more than a century ago in 1911 when the U.S. Supreme Court ruled in Grigsby vs. Russell. The ruling confirmed that life insurance is private property and therefore could be legally transferred to another owner like any other asset. Today, life settlements are regulated in most U.S. states. Regulations enforce state-approved contract language, business practices, disclosures for sellers, and licensing for brokers and buyers, among other things.
3. Opposition from life insurance carriers
Life insurance carriers have historically resisted life settlements. From a financial perspective, a life insurance surrender benefits the insurance company much more so than a life settlement. In a surrender, the carrier pays out the accumulated cash value less surrender fees to the insured. If the policy is instead sold in a life settlement, the insurance company will later pay out the death benefit — which will be much higher than the surrender value. At a granular, policy-specific level, carrier resistance makes sense.
However, from a broader perspective, life settlements can benefit carriers and the industry as a whole. One of the criticisms of life insurance is that policyholders must pay premiums for decades but only have access to a fraction of that value while they’re living. A life settlement increases that fractional value and gives the policyholder more flexibility to adjust to changing financial circumstances. In other words, having the option to sell a policy on the secondary market makes life insurance somewhat more attractive as a financial asset. That’s a selling point that life insurance carriers and agents can use to their advantage.
Also, carriers don’t actually lose anything in a single life settlement. Policies are underwritten to be profitable for the insurance company even if the death benefit is paid. Buyers of life insurance do continue paying the premiums after all. If carriers need to evolve their underwriting assumptions to assume a lower rate of surrenders as life settlements become more popular, they have the power to do that.
How do life insurance agents benefit from life settlements?
Life settlements have financial and reputation benefits for you as a life insurance agent. To start, you’ll likely earn a commission by referring your client to a life settlement broker if the policy is sold. You also benefit from keeping the policy alive — the life settlement company that purchases the policy will continue paying the premiums, generating ongoing commissions for you.
Additionally, a life settlement could enable you to take on a broader role with your client, in a cost-efficient way. Life settlements can create the liquidity needed to adjust to changing financial circumstances. At any given point in time, a client might be over-insured, in need of long-term care insurance, or suddenly concerned about long-term financial security. You have the expertise to help your client address those needs — but the client may need liquidity to implement your recommendations. The life settlement can provide it, and that creates a path for you to guide your client through an appropriate financial restructure.
That process can be incredibly rewarding for your client, but also for you as the agent. There are commissions to be earned through policy replacements, long-term care products, and other financial management services. But more importantly, you’ll have another tool in your arsenal to help clients realize their financial goals. And it’s a powerful tool at that. A senior who’s struggling financially should be overjoyed to realize that life insurance could be worth as much as 60% of its face value. If you’re the one to pitch life settlements as an option, you’ll likely solidify your role as a trusted advisor and maybe earn some referrals, too.
On the other hand, if you choose not to discuss life settlements with your client, another advisor might step in to fill that role.
How do your clients benefit from life settlements?
The primary benefits of a life settlement for the policyholder are the cash proceeds and the elimination of ongoing premiums. The influx of cash plus a streamlined budget could alleviate financial issues that are common to seniors. They could use the money to cover costs for healthcare or day care, to pay down debt, to pad their investment portfolio, to create an emergency fund, or simply to assist the ongoing living expenses.
What type of clients would qualify for a life settlement?
Policyholders over the age of 65 who hold some form of permanent life insurance usually qualify for a life settlement. Additionally, some term life policies qualify, depending on the status of the policy and the health of the insured. Convertible term life policies are usually marketable, as are non-convertible policies if the insured is terminally ill. Life insurance buyers prefer policies with a face value of at least $50,000. That $50,000 could be comprised of a single policy or multiple smaller policies bundled together.
Talk to your clients today
Life insurance as an industry is growing and evolving. The greater adoption of life settlements is one of those evolutions. Forward-thinking agents will recognize the value of understanding life settlements and using them to help their clients reach their financial goals. You may have clients today who are questioning the importance of keeping their life insurance, while trying to make ends meet with limited resources. For those clients, a discussion about life settlements is a win/win. Even if they don’t end up selling their insurance, you’ve acted in their best interest by presenting a lesser-known strategy that could meet their needs.
You can learn more about life settlements on the Harbor Life Settlements website. Essential resources to review include:
- Life Settlement FAQs
- Life Settlement Taxation
- Life Settlement Broker Process
- Understanding the Life Settlement Process
You can also loop in the Harbor Life Brokerage team to help you broaden your knowledge and present life settlements to your clients. Harbor Life Brokerage is a life settlement broker with a reputation for garnering high payouts for selling policyholders. The company has a network of premium buyers and an industry-leading online platform that streamlines the life settlement bidding process.