It’s our job to sell life insurance – so we don't usually talk about what to do when a client doesn’t need or want their policy anymore.
If you have a client who can’t afford their policy – especially if it’s due to health problems – you may want to help them look into a life settlement. Of course, this leaves them without any death benefit protection, which isn’t ideal. But if they either don’t need the coverage or have no financial option but to let it lapse, a settlement may be the ideal solution.
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With life insurance settlements, your client can sell their policy and pocket more cash than they would by surrendering it or letting it lapse. In most cases, clients who sell policies are seniors who need the money to pay for healthcare or long-term care. According to the Life Insurance Settlement Association (LISA), the average settlement value is 20% of the policy’s face value.
Why Do Clients Sell Life Insurance Policies?
The 1911 Supreme Court case Grigsby v. Russell ruled that life insurance is private property and can be sold like any other asset.
There are several common reasons why a client might decide they don’t need or want their policy anymore:
- They can’t afford to keep the policy. Let's say your client didn't pay enough into their universal life policy in the early years. Like an adjustable rate mortgage, those payments could balloon into more than they can afford.
- They can’t afford to convert a term policy. This happens when a client’s health takes a turn for the worse during the guaranteed premium period of their policy. If they can’t afford to renew, they may lapse their policy instead of finding a better solution.
- They no longer need the coverage. Maybe the kids are grown and the mortgage is paid off. Or maybe they acquired another source of cash to cover their expenses, like an inheritance they didn’t foresee. In that case, we can also help them with estate and financial planning!
- They have serious health problems that require all their available cash. Some seniors simply get overwhelmed with bills for healthcare and long-term care. Other times, a client with a terminal illness wants to use the money to enjoy some family time in the coming months and/or years left.
- They need the cash for another purpose, often an investment opportunity. Life insurance is an asset. Their policy is a possession they can sell like any other. If you have a client looking to rearrange their portfolio so they can take advantage of a new opportunity, selling an unneeded or unwanted policy could be a solution.
Talking about Options
When any of the above scenarios happen, many clients simply stop making payments. Unfortunately, that’s the worst decision they could make because it leaves them with nothing. As an agent, it’s our job to make sure they know what to do if any of these scenarios happen to them.
Your client's options will depend on their specific situation. If they have a terminal diagnosis, for example, reach out to the carrier and find out whether they can access accelerated death benefits. If they don't qualify or the policy doesn't offer them, a settlement is a better option than lapsing. Selling will net them anywhere from 4-7 times the surrender value of their policy, or roughly 10-25% of the policy’s face value. (Source: LISA)
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How Life Settlements Work
To help your client with a settlement, you need to work with a specialist – in most cases, a specifically licensed broker. They need to be licensed to submit a settlement contract, disclosures, anti-fraud documentation, and escrow agreements.
Your broker will do one of two things: take your client’s policy to a marketplace and offer it for sale, or approach buyers directly. In a marketplace scenario, investors bid on your client’s policy. In a direct-sale approach, your broker is responsible for negotiating and closing the sale. Either way, a prospective buyer will need to see your client’s health history and medical records to confirm their life expectancy.
A 2010 U.S. Government Accountability Office study found that from 2006-2009, policy owners got $5.62 billion more through settlements than they would have if they'd surrendered their policies.
Buyers are usually investors looking to buy policies on the secondary market. They take over payments for the policy, and collect the death benefit when your client passes away. Because they want a relatively quick payout, they look for policies that belong to seniors or people in bad health. The higher the face amount, the more likely a qualifying policy is to sell. According to Magna Life Settlements, the average face value for life settlements in 2018 was $1.24 million. (Source: Forbes)
There are other considerations, too - each state has its own waiting period, from two to five years from the policy’s date of issue. States may have other requirements, like a terminal illness diagnosis for the policyholder or the requirement for the payout to exceed the accelerated death benefit portion of the policy.
Life Settlements: Ideal Client Profile
If you’re interested in marketing life insurance settlements, scan your book of business for clients who fit the following profile:
- Age 65+
- Recent change in health: terminal illness diagnosis or unable to complete 2 of 5 ADLs. If your client has a terminal diagnosis, their age doesn't matter.
- Owns a universal life or convertible term policy
Of course, these are just the ideal characteristics. According to LISA, if your client is at least age 65 and has a policy with a face value of at least $100,000, there's a good chance they can sell their policy even if they’re in good health.
What if your client has a term policy and wants some but not all of their current coverage? Not a problem. We can use their policy's conversion option to convert a portion of their policy and sell the remainder.
Keep in mind that if your client sells their policy for a big payout, that will generate tax liability. It may also complicate their qualification for Medicaid. It’s important to bring up these issues early in the discussion so your clients know exactly what a sale could mean for their finances (both good and bad). We can help you work out all these details so you can have an educated conversation about the pros and cons with your client.
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How to Bring It up with Clients
As we mentioned, most clients don’t know selling their policy is an option. The best way to make sure they understand all their options is to bring it up several times throughout your relationship:
- When their policy goes in force. Make sure their client onboarding materials explain what to do if they can’t afford the policy or don’t need it anymore.
- During annual review. When you ask about any life changes (such as employment, marriage, divorce, etc.), ask about any big changes to their health. If you hear about any developing health problems, do another follow-up in the coming months.
- Occasional reminders based on news, stats, etc. See a sound bite about the cost of long-term care? Or the rise in deaths from a form of cancer? It’s not the best of news to lead off with, but it’s a good excuse to contact clients. Remind them that if they’re struggling to keep a policy, there are options.
- 3-6 months before their term policy expires. If you already send marketing letters to clients with an expiration date coming up, great job! You can also sneak in a teaser to tell them you have a solution if there’s absolutely no way they can afford to keep the policy (or qualify for a conversion).
- 3-6 months before their term policy’s conversion option expires, if different from the above. Investors would rather have a convertible term policy than a non-convertible policy. That means clients ideally want to start the settlement process a few months before their guaranteed period ends.
Of course, we always want our clients to have - and keep - the protection a death benefit provides. But in some cases, that's just not possible or desirable for that client. If that's the case, there are still ways you can help convert or sell that policy to maximize the financial benefit when they need it most. That's what being an agent is all about - helping our clients through thick and thin.
Have clients interested in life insurance settlements?
We can help! Contact us and we'll help you come up with a game plan.