Although life insurance is a mature industry, it still continues to evolve. In the past, much of that evolution has been in the expansion of products, features, and riders that allow policyholders to customize their insurance to specific situations. More recently, the industry has been shaped by an increasing interest in life settlements — these are transactions that transfer ownership of a life insurance policy from the policyholder to a third-party.
The growing popularity of life settlements is understandable. The life settlement market benefits policyholders by improving the value and liquidity of their life insurance assets. And investors appreciate life settlements as a new asset class with high-return characteristics. But even insurance carriers and advisors stand to gain from the growth of life settlements. Carriers can position the life settlement as a value-add for their product and their customers. And advisors who have a vested interest in their clients’ financial success can present life settlements as another tool to help those clients reach their financial goals.
Read on for the most important life settlement and life insurance facts and statistics for 2021 — including how many people have life insurance, the average face value of life insurance policies, how life settlement proceeds compare to cash surrender values, and how quickly the life settlement industry is growing.
Life Insurance Statistics for 2022
Notably, two years that fall outside that trend are 2001 and 2002. In those years, about 40 million policies were issued. Experts attribute the increase to the September 11 attacks, a catastrophe that resulted in more than $30 billion in life insurance payouts.
If you’re wondering how many people have life insurance, the answer is about 54% of the U.S. adult population, or roughly 255 million. The number of active U.S. life insurance policies and the value of those policies dipped significantly in the year following the Great Recession. Since then, the face value of individual policies has recovered — and in 2020 the industry saw a 2% increase in the amount of life insurance applications, likely influenced by higher interest as a result of the COVID-19 pandemic.
There are several reasons someone might be motivated to buy life insurance — to create an inheritance, to save for retirement, or to benefit from tax-deferred earnings growth. But the most common reason to buy life insurance, cited by 37% of survey respondents, is income replacement. When income replacement is the goal, the death benefit payout is intended to help surviving family members cover living expenses after the primary breadwinner passes away.
The average face value on a life insurance policy, which is equal to the policy’s original death benefit, is $168,000. In total, the face value of all life insurance policies purchased in the U.S. is $3.29 trillion. Now consider that in 2020 total life insurance benefits and claims were $747.4 billion. The face value of policies is 4.4 times more than the benefit and claim amounts, meaning insurance companies are making a substantial profit. Part of this is because many policyholders don’t understand their options when they no longer want or can afford their policy. Some choose to lapse or surrender their policy for a non-existent or minimal sum. A better alternative is selling the policy through a life settlement, which can yield a value 4-11 times higher than surrendering it.
Most Americans don’t have enough life insurance to fund funeral costs, repay debts, and replace lost income. Given that the median household income in the U.S. is $63,179, the average death benefit of $168,000 will be consumed within three years if it’s used to cover funeral costs and living expenses.
When income replacement is the goal, advisors often recommend securing coverage equivalent to 10 to 15 times the breadwinner’s annual income. That way, the surviving parent can maintain the family’s quality of life, while taking steps to secure income sources for the future.
Life insurance premiums on new policies get progressively more expensive as the applicant gets older. Younger policyholders will pay a longer stream of premium payments, but each year’s investment will be lower. With respect to permanent life insurance, younger applicants have more years ahead of them to build up that policy’s cash value. Policies with ample cash value can provide liquidity, which is particularly useful for retirees.
Life insurance can be expensive, but it doesn’t have to be. Term life policies for younger, non-smoking insureds have premiums as low as $200 per year. Whole life policies, which have a built-in savings component, will cost more — $3,000 to $5,000 or more annually depending on the age and health of the insured. Term life insurance is often acceptable when the policyholder needs a large amount of coverage for income replacement. Whole life and other types of permanent life coverage are suitable when the goal is to pass on an inheritance or supplement retirement savings.
Group life insurance is free or low-cost coverage offered through an employer or other organization. While group life insurance is affordable, it has some drawbacks. Notably, group life is typically offered only in low, default amounts, typically $50,000 or one to two times the employee’s annual salary. That usually means the coverage won’t be well aligned with an individual policyholder’s financial needs.
Life insurance premiums for women are about 30% lower than life insurance premiums for men of the same age and general health. Insurance carriers charge women less because they have a longer average lifespan. This means it’s more likely a woman’s policy will lapse or be surrendered before the death benefit is paid.
Standard life insurance generally requires the applicant to submit to a medical exam. While getting blood drawn and answering personal lifestyle questions is never great fun, it’s to the applicant’s benefit to comply. Insurance providers set premiums based on risk, and risk is much lower for the healthier individual. If the insurance carrier can’t verify the applicant’s health status, the premiums will be set high to compensate for the uncertainty.
Californians purchase $452 billion in life insurance each year, while Wyoming residents only purchase about $5 billion. Most of the difference is related to the population variance between these two states, however.
More than half (51%) of Americans would rather buy insurance in a face-to-face setting vs. purchasing coverage independently online. However, just under a third of Millennials (28%) and Baby Boomers (29%) say they’d rather shop for and buy life insurance online.
Age is one of the largest factors in the cost of life insurance, and over time premiums will increase in correlation with your age. This is due to increased health risks that come with age. Premium increases are less severe when you’re young, usually about 5% per year in your 40s. However, in your 50s premium increases can be 12% annually.
Life insurance remains an important financial tool for many U.S. households. Income replacement is a strong selling point. An appropriately sized death benefit can provide years of financial security for surviving family members. Unfortunately, most policyholders aren’t carrying enough coverage to serve that goal.
The average face value of life insurance is $168,000, which is only about two and a half times the median U.S. household income. Advisors typically recommend coverage equivalent to 10 or 15 times the insured’s annual income, which would cover funeral costs, some debt paydown, and several years of living expenses. At the median household income level of $63,179, that translates to a death benefit of about $630,000 to $950,000. Some families will want an even higher death benefit, to include funds for future college tuition for the kids and other expenses.
Would-be policyholders may look at the cost of that coverage and decide that it’s either not worth it, or that they’ll have to settle for less. The best way to ensure you have adequate coverage that’s affordable is by familiarizing yourself with options and starting early. For help finding a life insurance policy tailored to your needs, use our free online Quote Tool to get a quote from some of the top-rated life insurance companies, or contact us for assistance choosing a policy.
Life Settlement Industry Statistics for 2022
Statistically speaking, 85% of term policies and 88% of universal life policies will expire, lapse, or be surrendered before a death benefit is paid. Those statistics represent lost dollars for the policyholders who invest in life insurance without ever fully realizing its value.
Policyholders who don’t want to keep their life insurance have three main options. They can stop paying the premiums and the policy will eventually lapse. They can request to surrender the policy immediately. In that case, the insurance company would pay out the accumulated cash value, less loan balances and surrender fees — an amount known as the cash surrender value. As a third option, the policyholder can sell the policy in a life settlement.
Of these choices, the life settlement is the most fruitful for the policyholder. A report from the London Business School estimates that life settlement proceeds are about four times more, on average, than cash surrender values. That means a policy with a cash surrender value of $25,000 could be worth six figures on the life settlement market.
Even as closed settlements and third-party analyses continue to confirm that life settlements generate higher proceeds for policyholders, people still choose to lapse or surrender their life insurance. In many cases, these policyholders simply don’t know that selling their policy is an option.
More than half (55%) of Americans aren’t familiar with life settlements and more than two-thirds (68%) of Americans aren’t familiar with viatical settlements. These policyholders are most at risk for lapsing or surrendering their life insurance for less than it’s worth.
The life settlement industry is poised to grow substantially in the coming years. Contributing factors include an aging population and generally low balances in retirement savings accounts. Between 2015 and 2025, the U.S. senior population will grow by 38%, and many of those seniors won’t have sufficient retirement savings to replace their working income. Those who have life insurance — estimated to be 50% of seniors — can liquidate those life insurance assets to produce much-needed funding for retirement.
The projected $200 billion in life insurance that will be lapsed or surrendered each year is potentially worth $50 billion on the life settlement market. That assumes a payout rate of 25%, the midpoint of the typical life settlement payout range of 20% to 30% of the policy’s face value. Pulling in the London Business School conclusion that life settlements generate four times more than cash surrender value, policyholders receive an estimated $12.5 billion in cash, or less, for these life insurance assets. That’s 25 cents on the dollar, which amounts to $37.5 billion in lost wealth for seniors.
The life settlement industry stands to play a critical role in redirecting some of that wealth to cash-strapped seniors. That will only happen, though, if general awareness around life settlements continues to grow. Currently, too many policyholders are unknowingly walking away from the potential value of their life insurance by surrendering or lapsing the coverage. These policyholders are likely motivated to eliminate their premium payments and, where applicable, recoup their cash surrender value. When money is tight and bills are piling up, a surrender may even seem like a good solution — but only for those who don’t realize that a life settlement produces much higher cash proceeds.
Life Insurance and Life Settlement Trends Heading Into 2022
Demand for new life insurance policies has been stagnant since the early 2000s, even as insurers have expanded product offerings to address specific customer needs. Meanwhile, the life settlement market is creating new financial opportunities for policyholders by allowing them to unlock wealth they didn’t know they had. This adds a new dynamic to an industry that has struggled to increase its relevance with consumers over the last 20 years.
In the years ahead, forward-thinking insurance carriers will recognize that a growing life settlement market benefits them, their brokers, and their customers. Carriers that resist life settlement growth, on the other hand, may face some reputation consequences. Policyholders and consumers are likely to interpret that resistance as a profit-oriented stance that disregards their customers’ financial wellbeing.
If you are interested in selling your life insurance through a life settlement, contact Harbor Life Settlements today for a free estimate and find out how much your policy could be worth.