Life Insurance: An Asset Hidden in Plain View

The baby boomers, many of them members of the “401k generation,” are facing a troubling issue in the midst of retirement: a growing gap between their income and their expenses, and limited opportunities to close it.

Many are shocked to find just how much health care costs figure into their retirement equation. According to a recent estimate from Fidelity, a 65-year-old couple retiring in 2016 can expect to spend about $260,000 on health care. This is considerably more than most couples have budgeted.

Closing the gap through new income in retirement can be difficult. Downsizing and part-time work can help, but these strategies are difficult for some and impossible for others.

However, many seniors are unaware of the true market value of an important asset they already own – their life insurance policy. After paying premiums for decades, they may know their policy has a small value if surrendered to their insurance company. But most are completely unaware of the income-generating potential of that asset in the secondary market.

The Basics

In the secondary market for life insurance, seniors sell their policies to third parties for more than the surrender value, but less than the final benefit. In these transactions, seniors often receive a settlement that is four to 10 times their policy’s surrender value. The purchaser continues to pay the premiums until maturity.

The Clients

Candidates for these transactions are seniors who no longer want, need or can afford their policy. High-net-worth clients may own a policy that was purchased when their life circumstances were much different. Perhaps their children are grown with careers of their own and do not need the coverage their parents’ life insurance provides.

In other instances, premiums have increased to the point where they are no longer affordable. Often, policyholders either turn in the policy for the surrender value, or simply stop paying and let the policy lapse. If you have clients considering this, sharing with them the possibilities of the secondary market could provide them with a much-needed and unexpected financial benefit.

The benefit can help defray medical costs, or pay for long-term care. Others may use the proceeds to augment their retirement income, provide gifts to family members or donate to charity.

In some instances, seniors may be eligible for a cash payment, while retaining a portion of the policy’s benefit and ending their premium responsibilities. These blended transactions can be attractive to those who want to provide for heirs.

The How-To

Selling a life insurance policy is not a one-size-fits-all transaction. The actuarial value of every policy is different, although transactions often share these commonalities:

  • Usually, the policy is universal or convertible-term.
  • The typical candidate is 65 or older.
  • The face value of the policy exceeds $100,000.

There are tax considerations. In brief, if the cash or other consideration received on the sale of a life insurance policy exceeds the inside build-up under the contract, the excess may qualify as gain from the sale or exchange of a capital asset. As an example, a policy with a $500,000 face value could have $75,000 settlement amount with a $65,000 cost basis. The result in that transaction would be a $10,000 capital gain for tax purposes.

In our experience, “buyer’s remorse” has not been an issue and there are several reasons for this:

  • The policyowners who sell are typically faced with an imminent termination (i.e., lapse) of the policy because they can no longer afford the premiums or need the coverage. The payment they receive can be far more than if they lapsed or surrendered their policy.
  • Following industry standard, we make sure the policy owner receives disclosures in writing and understands all the implications of the sale including the taxes, alternatives and risks.
  • To eliminate the potential for a seller or beneficiary to make a claim after the sale, we require the policy owner to obtain a competency certification from their own attending physician and we require the beneficiaries acknowledge the sale.
  • Any agent or entity sourcing policies under our Appointed Agent program is covered by our Errors and Omissions insurance policy. Policy owners acknowledge prior to entering into the sale of the policy that the individual or entity is acting as a GWG Life Appointed Agent.

Companies in the secondary market can purchase policies via referrals from insurance agents and financial advisors, or through brokers. It is often insurance agents who contact settlement brokers, who in turn act as coordinators for the process, shopping a policy to multiple companies while working to find the best price.

The market is growing. Conning Research estimates that seniors annually represent a potential $182 billion in life insurance policies that could be purchased.

These policies can be assets with the power to change financial lives. But only if your clients are aware of it.

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