By Robin Roberts, CME CSA CSE, is chief adviser at BrightPath Financial Corp.
Most people don’t think that life insurance policies are an asset, and therefore marketable
As published in MarketWatch
It’s hard to believe that more than $110 billion in life insurance lapsed or was surrendered last year by individuals over the age of 65, according to Darwin Bayston, president of the Life Insurance Settlement Association. Why would anyone give up that type of money? More importantly, could this happen to you?
Most people don’t think that life insurance policies are an asset, and therefore marketable (i.e., can be sold). In fact, the U.S. Supreme Court ruled in the case of Ghrigsby v. Russell that life insurance policies are personal property, and therefore marketable.
Most people don’t consider that life insurance policies to be marketable assets because we purchase life insurance to help our young families in case of a sudden or premature death. Over time, we continue to pay the premiums after our children are older, independent and making their own living. Often, life insurance policy owners tend to surrender their policies for the cash surrender value because they believe that is their only option.
(It’s not uncommon to be unaware of this strategy, selling your life insurance policy in the secondary market — a life settlement. During my 40-year career in the community banking industry, I had never heard of this either. After reading this article, please let people know this is a viable option to stop making premium payments while obtaining a lump sum of cash now.)
Life settlements aren’t commonly known, in fact, 65% of financial advisors have never recommended a life settlement to a client. This largely stems from their lack of knowledge of the ability to sell life insurance policies, according to a 2015 survey conducted by WealthManagement.com. In addition, many financial advisors are prohibited by their life insurance companies to share this information with their clients.
Studies have shown that the face amount of universal, variable, whole and term life insurance policies (only) of those 65 and over, that were surrendered or lapsed, receiving only the cash surrender value exceeded $112 billion.
The benefit of a life settlement to my clients (who are typically over 75 years old) is that they can obtain much more than the cash surrender value on their unneeded or unwanted life insurance policies. So, why would someone like you want to sell your life insurance policy?
- Your heirs changed, and you no longer need the protection.
- You have a better use for the money that used to pay for the premiums.
- The premiums may have increased recently, and the policy is no longer affordable.
- A lump-sum of cash would be beneficial for several potential expenses or investments.
- You would like to donate money to a non-profit organization, or have the ability to gift it to heirs now.
A critical benefit of selling your life insurance policy, as opposed to accepting the cash surrender value offered by the life insurance company, is that you have the ability to earn much more by selling your life insurance policy in the open market.
In a United States General Accounting Office study conducted in 2014, it showed that those who sold their life insurance policies earned up to seven times more than what they were offered by the life insurance companies’ cash surrender value. Consider what that means: for every $1,000 offered by your life insurance company by surrendering your policy to them, you could earn up to $7,000 by entering into a life settlement transaction.
Most life insurance policies are eligible to be sold, even term insurance can be sold if it is convertible. So, who are the buyers of these life insurance policies and what’s in it for them? To name a few: Goldman Sachs, Berkshire Hathaway and Bank of America are some of the big players in this industry. All of these companies competitively bid on the best life insurance policies. These firms, and many smaller private equity companies, consider a life insurance policy like any other asset.
How do these firms establish a price they are willing to offer? Just like a house or any other asset, what would you be willing to pay for it today, assuming you would have to pay $X in maintenance costs over the next Y Years, and receive $Z (the face amount of the life insurance policy) at some point in the future. This is just another exercise in understanding the value of discounted cash flows, with the uncertainty of time (being the death of the insured).
The ability to sell one’s life insurance policy is also available to businesses. Oftentimes, life insurance policies are purchased on business owners and key executives, to ensure continuity of the business if an owner passes on prematurely. Many business owners and their chief financial officers are not aware of the option to sell the policy if the company is wound-down or sold. A life insurance policy is an asset and can be sold in the secondary market.
Typically, life insurance policies with a face value as low as $100,000 are marketable. If you are interested in learning more about the potential value of your life insurance policy, be certain to work with someone who conducts a competitive bidding process. As in real estate, a competitive marketplace ensures you get the best price.
Help yourself, your family and friends by being aware of this valuable option. Years of paid premiums should provide you more than the cash surrender value offered by the insurance companies. You can normally obtain more money by considering a life settlement transaction for your unwanted and unneeded life insurance policy.
The life settlement industry can help you, your family, friends and colleagues obtain more than the cash surrender value of a life insurance policy. This industry is growing and will likely average $3 billion per year over the next decade, according to a 2015 survey conducted by WealthManagement.com.