Do you need your current life insurance policy any longer, or have your needs changed? Possibly your premiums are becoming too expensive or your policy is under-performing its original projections. Could it be that your policy is lapsing without value, or you are leaving behind a group life benefit?
An active and rapidly growing secondary market for life insurance emerged less than 10 years ago. This has created a new dimension to estate and financial planning. Not only does this secondary market enhance the asset management options available to advisors and their senior clients, but also it redefines the liquidity and asset value characteristics of the life insurance asset class for this demographic group of policyholders. The existence of life settlements, as the secondary market is called, will require advisors to become knowledgeable and proactive on behalf of their clients.
Life insurance is customarily purchased for planning needs that span a time horizon as few as five or as many as 50 years. Yet, circumstances change. As a result, life settlements should be viewed as a sophisticated transactional component of a life insurance management and periodic restructure process that requires credible product suitability evaluation, objective analysis, full disclosure and client affirmation.
LIFE SETTLEMENT
A life settlement is the sale to a third-party purchaser of a life insurance policy that is no longer affordable, suitable or wanted for its fair market value - an amount in excess of the contract's cash surrender value but less than its death benefit. The policy owner/seller (who can be other than the insured) is not restricted in the use of the proceeds. The settlement com-pany acquires policy ownership, names itself the beneficiary and is solely responsible for future premiums payments.
Most life insurance policy types qualify for a life settlement. These include whole life, universal life, variable life, adjustable life, survivorship life, term life and even group term life (if assignable and convertible). Policies can be owned by individuals, corporations, partnerships, trusts and charities.
Prior to the secondary life settlement marketplace, a policyholder had two choices when disposing of policy: surrender for its net cash value or allow it to lapse without any value. The cash surrender values of unwanted policies average just under 4 percent of the policy face amounts, while life settlements average 25 to 30 percent of the face amount.
Some examples are:
■ A $1-million, trust-owned policy with a $2,500 cash surrender value insuring an 82-year-old female sold for $200,000 ($197,500 more than the cash surrender value);
■ A $500,000 convertible group term policy sold to a 68-year-old retiring executive for $90,000 ($90,000 more than taking nothing and walking away);
■ A $2.5-million key-man policy, insuring a 79-year-old man and no longer needed by the company, sold for $725,000 ($521,500 more than its cash value of $228,500).
In 1911, the United States Supreme Court ruled that a life insurance policy is personal property and can, therefore, be sold by its owner. The secondary market thus became established, demonstrating the enhanced liquidity and asset value available to seniors for about-to-be-lapsed, unwanted or unsuitable life insurance policies. Advisors should integrate this option into their respective practice management and standard of core procedures.
In summary, life settlements create a paradigm shift in estate and financial planning for seniors that require life insurance to be actively managed no differently from fixed income, equity and real estate asset classes. This secondary market continues to experience dramatic growth because it: a) addresses a basic consumer demand similar to the secondary market for securities and real estate; and b) attracts established and credible institutional funding sources into the billions of dollars into this market.
James R. Feek is a certified estate planner, registered financial consultant and principal of Feek*Justice Financial. He can be reached at 425-828-1400.
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