The life insurance industry has a revenue-producing secret for you that could be a crucial source of income for your clients as they head into retirement.
The secret: Life insurance policies are just like any other investment and don’t have to be cashed in from the company that sold them; they can be sold on an open market called the life insurance secondary market. For clients who are holding onto policies purchased for a death benefit they can be a lifeline in retirement and the best price they are likely to receive for them will be through the secondary market for life insurance policies.
As the cost of long term care has skyrocketed, financing post-retirement is forcing seniors to get the most out of all of their investments. Most consumers are in the dark about the value life insurance policies hold that they may have bought long ago for estate planning purposes or to protect a small business. In the worst-case scenario, a policy is lapsed because the owner doesn’t want to pay the premiums anymore. For many, the only other alternative is to surrender the policy back to the originating life insurance company for a fraction of the amount they could receive on the secondary market.
As an agent, smart use of the secondary market as an outlet for an unneeded policy can deliver new value to the policy owner and a new profit center to an agent’s practice. Instead of lapsing or surrendering a policy, seniors and their families have the ability to turn a death benefit into a variety of aftermarket living benefits, lump-sum cash, or a retained death benefit. These options provide more than one way to address the unique financial challenges of retirement and those struggling with declining, chronic, or terminal health.
Welcome to a New Market
Established by a Supreme Court decision in 1911, today’s secondary market is a well-regulated, mainstream financial vehicle that provides a number of solutions for agents and advisors working with senior clients. As a best practice, agents are adding settlements to their product mix just like any other insurance-based option. As part of a discovery and review process, determining what is the best use for an in-force life insurance policy is both a matter of common sense and fiduciary responsibility.
The Problem
Millions of seniors own and have made payments on life insurance policies that they will lapse or surrender without realizing their policy is actually an asset with secondary market value. Unfortunately, too few policy owners understand this fact and, according to the Life Insurance Settlement Association, almost nine out of 10 universal life insurance policies will be abandoned before paying out a death benefit.
The Solution
Over a decade ago, the market started to become mainstream and life settlements were viewed as a viable solution to pay for long term care. This marked a shift in the marketplace that opened up settlements to a larger, middle class population who would rather exchange an unneeded death benefit than simply abandon it. Now a life insurance policy can be exchanged for a variety of financial vehicles designed to address the unique needs of seniors including long term care benefits, annuities, retained death benefits, or lump-sum cash.
The Strategy
Providing the settlement option to your clients on a daily basis, just like a life, annuity, LTCI, or DI product, is both a smart offensive and defensive strategy for your practice.
Retail Strategy:
- The secondary market option can be actively promoted to clients to help them or family members as they consider their options with an in-force life insurance policy. Adding this option to marketing materials, presentations/seminars, advertising, website, social media, and your discovery/advisement process with clients provides a powerful option to monetize an existing asset instead of abandoning it.
Wholesale Strategy:
- Reviewing your entire book of business can identify policies among your clients that could be settled before they are abandoned. Adding this back-office system turns old business into new leads and creates a recurring profit center.
Four Common Case Scenarios
1) Partial Surrender vs. Retained Death Benefit
Let’s look at the hypothetical case of a client with a $1 million term life policy that doesn’t need or want to maintain the death benefit and is considering converting the policy to a reduced death benefit amount of $100,000.
If the insured is older than 65 with impaired health conditions, they may be eligible for the secondary market exchange of their policy instead of a partial surrender back to the carrier. In this circumstance, the insured may qualify for as much as $200,000 to $300,000 (or more) of retained death benefit without paying any more premiums. For the agent, their compensation is based on the conversion of the $1 million of face amount that is settled as well as the exchange referral fee. The policy owner and agent who executed a reduced death benefit through the secondary market ended up with a scenario much more valuable, and relieved themselves of the need to make any more premium payments.
2) Long Term Care Benefit Instead of Surrendering to Spend Down for Medicaid
Many seniors who need funding to pay for senior living or long term care will think their best bet is to qualify for Medicaid by spending down their assets. If they own a life insurance policy, many times their first impulse is to abandon the policy in order to qualify for Medicaid. But, they may be throwing away their chance to remain a private-pay patient and stay in control of their health care decisions.
In this case, let’s say this policy owner has a $100,000 policy with $5,000 of cash surrender value. To qualify for Medicaid, they would spend that $5,000 down on care in probably a month or two and then go straight onto Medicaid. But if they were to access my company’s LifeCareXChange, they could receive a $30,000 to $50,000 settlement that could be used to fund a Long Term Care Benefit Account (sort of like an LTC-HSA exclusively funded by a settlement) that would allow them to remain private pay with their choice of care setting for as long as there is money in the benefit account.
3) Lump Sum Settlement as a Policy Exit Strategy
Many life policy owners purchased large-face policies for estate planning purposes. Until 2018, the estate tax threshold for an individual was $5,490,000 and twice that for a couple. But, with the enactment of tax reform, the estate tax threshold for an individual is now $11.18 million and twice that for a couple—more than $22 million. As a result, there are life insurance policy owners who may be deciding they no longer need to carry large face policies designed to protect their estates. After years of premium payments, they could be walking away from their policies for big losses.
Let’s say you have a policy owner with a $5 million term or universal life policy and, instead of abandoning it, the owner decides to seek out the secondary market value as an alternative. It is quite possible, depending on their age and severity of health impairments, that they could receive 20 percent or greater of the policy’s face value. So, let’s be conservative and assume they received 20 percent for a lump sum payment of $1 million. For the policy owner, this is a much smarter exit strategy out of the policy than if they were to lapse or surrender.
For the agent, they would receive a referral fee based on the death benefit amount of the policy and, if it is a convertible term life policy, they are able to receive the conversion compensation as well. In this scenario, instead of abandoning the policy for little to nothing in return, the policy owner received the secondary market value for a much larger and smarter exit strategy.
Secondary Market Xchange to Fund an Annuity
What is the best strategy for a client who owns a life insurance policy they no longer plan to keep in force and is looking for ways to establish a guaranteed monthly income stream? There are a variety of annuities that will create guaranteed monthly income streams for either a period certain timeframe or for the life of the annuitant. For a policy owner with cash surrender value, a likely scenario is to surrender the cash value in the policy to fund an annuity on a tax-deferred basis. The agent will be compensated based on the amount of funds from the policy surrender that is rolled over into the annuity.
But what about the policy owner who explores funding an annuity with the secondary market value of their policy?
Let’s say a policy owner with a $500,000 policy has $50,000 of cash surrender value in it. They could exchange the $50,000 into an annuity, and their agent would be compensated for the annuity purchase at that level. However, what if this policy owner was able to qualify for the secondary market exchange of their policy instead and receive 20 percent or more of the face value of their policy? In this case, the policy owner would settle their policy for $100,000 or more, giving them far more than the cash surrender value to fund their annuity. This would obviously create a bigger monthly income stream for them and, in turn, as the agent you would be compensated at a higher level.
Conclusion
As the insurance industry struggles to stay in the same place it was 50 years ago—the American Council of Life Insurers reported that the U.S. life industry sold 27 million policies in 1965—the same amount it sold in 2016—to a population that was 50 percent larger. To thrive in today’s market requires adaptability, responsiveness, and creativity. Advisors know they need to add innovative solutions to their toolbox as market conditions continue to evolve at a rapid pace. As a best practice, those able to identify and harness emerging market opportunities put themselves in the enviable position of creating new solutions for their clients and new profit centers for their businesses.
