Data Suggests Life Settlements Present an Underutilized Resource for Advisors

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Based on data recently compiled from 2008, it’s estimated that senior citizens are letting roughly $112 billion go to waste in lapsed universal, term, and whole life insurance policies. Unfortunately, the data is not available from any later, but Life Settlement Advisors estimates that the number is even higher today.

The life settlement market provides many benefits to both the client as well as the financial advisor. For your client, there’s no cost to them for a life settlement, and they receive liquidity for their investment.

Based on data recently compiled from 2008, it’s estimated that senior citizens are letting roughly $112 billion go to waste in lapsed universal, term, and whole life insurance policies. Unfortunately, the data is not available from any later, but Life Settlement Advisors estimates that the number is even higher today.

In a world when many seniors are outliving their retirement savings, this number is significant for two reasons. First, it means many seniors are letting these policies lapse in order to drop the monthly premium, and cut costs in retirement. Second, it is indicative of a significant amount of money being let go that seniors could use to help them live a better retirement.

Life settlements are highly underutilized as fiscal tools by most financial advisors. For the most part, this is because of a simple lack of knowledge about them. Even though the market has existed for over 20 years, life settlements still aren’t a mainstream opportunity that advisors think of as they work with their older clients. And why would they be? Most advisors may only run across an opportunity for a life settlement every two or three years at the absolute most—it may be ten or more years between these chances. Many advisors are not talking to their elderly clients about life settlements as they do not have a comfort level or general understanding of the process and/or the possible benefits to the seller.

Life settlements are not great options for everyone, but when they are, they open up a world of possibilities for both alternative investment opportunities, as well as discretionary income for the insured to spend how they see fit, whether it’s a down payment on a vacation home or simply putting it away for the future. After all, over 80% of all life policies will lapse or are surrendered. That means a lot of investment dollars go to waste.

But how can an advisor know if a client is a good fit for a life settlement? There are a few best practices recommended in the industry.

Most of the seniors who sell life insurance policies as life settlements have policies that are either underperforming, or simply have a policy they don’t want or need anymore. Whether they’ve retired and the need just isn’t there, or the ROI on the monthly premium isn’t what they would like to see, the best policies to sell as life settlements are those that are unneeded and unwanted.

The candidates for life settlements all share a few common traits. Specifically, the insured needs to be 65 years or older with a life expectancy of 3-12 years. Any policy worth $100,000 or more is a great start, and it’s best if the insured has experienced a change in insurability since they got the policy. The policy should also be beyond the 2-year contestability period.

Some life insurance policies work better for life settlements than others do. The three most common types of policies that are purchased are Universal, Whole Life, and convertible Term Life. However, the following also qualify:

Adjustable Life
Survivorship or Joint Life
Portable Group Life (as long as it’s convertible)
Key Man or Corporate Owned Life Insurance (COLI)

It’s understandable that most financial advisors aren’t familiar with the life settlement market or the process for selling a life insurance policy. Because of that, of course, it’s best practice to get in touch with a professional who works heavily, if not exclusively, in the life settlement market. After all, going to a mechanic with a cough doesn’t help anyone.

A life settlement professional can provide an advisor with knowledge of the market, as well as resources the advisor needs to help the client make an educated decision, and provide full transparency on the values of the policy before an offer is accepted.

A client may not be aware that he or she has a life insurance policy that may be a good fit for a life settlement. If an advisor finds that they need additional liquidity or otherwise are in need of funds, it is recommended that the advisor ask the client some of the questions below. A trusted advisor may already know some of the answers.

When was the last time the client had the policy reviewed?
Does the client possess a policy that’s underperforming?
Does the client still have a need for this policy?
Has the client experienced any significant life changing events?
Is the client’s policy about to lapse, or is he or she planning to surrender it?
If the answer to any of these questions is yes, the life settlement market is a worthwhile option to explore.

The life settlement market provides many benefits to both the client as well as the financial advisor. For a client, there’s no cost to them for a life settlement, and the client receives liquidity for the investment. The client is no longer responsible for the burden of the monthly premium, and the client is able to fund a product that fits more relevant needs. For advisors, it frees up cash and generates liquidity to invest elsewhere. Most importantly, it shows that the advisor has the client’s best interests in mind. Rather than simply letting the policy lapse or be surrendered, the advisor is exploring every option. It may not be a right fit, but the advisor checked all venues, and that is what is most important.

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Leo LaGrotte
@LSA_LLC
since: 11/2012
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Life Settlement Advisors, LLC

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