Life Settlement Annuities combine the uniquely advantageous features of both annuities and life settlements to help address the financial challenges brought on by aging and declining health for seniors in retirement. A Life Settlement Annuity is the seamless rollover of the funds realized through a life settlement into an annuity that can be underwritten to provide higher value relative to an individual’s rated age and health than a standard annuity.
As the American population ages, retirees face myriad financial concerns ranging from maintaining their lifestyle to the fear of running out of money. The looming specter of declining health and the eventual need for long term care adds another layer of complexity and urgency for seniors. In this challenging landscape, an emerging financial option called a “Life Settlement Annuity” combines the advantages of annuities and of a life settlement to help address the desire for financial security and independence.
The fears haunting retirees—running out of money, facing dependence, and grappling with healthcare costs—are
becoming more urgent as the population ages. Statistics paint a sobering picture: by 2025, Baby Boomers will begin hitting 80, and a staggering 70 percent of individuals over 65 will require formal long term care.
In this landscape of financial uncertainty, the insurance industry stands as a rock of stability. With a significant portion of Americans owning life insurance, the creative uses of these assets can unlock unique opportunities for the policy owners. As retirement unfolds, people can outlive their need for the life insurance policies they purchased in years past and decisions need to be made. Enter life settlement annuities—an innovative solution changing the retirement game for seniors with some new options for their assets to consider.
Unlocking Hidden Value for Retirees through Life Insurance and Annuities
Life insurance and annuities have been experiencing a surge in growth. In 2021, there were 260 million life insurance policies in force, amounting to $21.2 trillion in death benefit. Annuities, a key player in retirement planning, saw $2.53 trillion in-force with $310 billion in sales in 2022, marking a 22 percent increase from the previous year. As annuities continue to rise in popularity, the industry predicts a 14 percent overall increase in annuity sales in 2023, with fixed-indexed annuities expected to rise by 25 percent and fixed-deferred annuities by 20 percent.
More people are worried about their ability to retire and outliving their money than ever before. In recent years, as interest rates have gone up, annuities have emerged as a flight to safety and financial stability for retirees, providing a range of benefits that address the fears of seniors including guaranteed income for life, income for spouses or beneficiaries, tax-deferred growth, protection from market volatility, and income acceleration for long term care needs.
Life settlements have become a mainstream financial option for seniors due to high public awareness generated by large advertising campaigns. The settlement of an unneeded or unwanted policy provides numerous advantages for policy owners including: Economically rewarding seniors for advancing age and impairments; providing liquidity for retirement income and health/long term care needs; offering tax-advantaged income for health and long term care need; and, there are no costs or ongoing premium obligations for the policy owner.
Consumer awareness of life settlements is at an all-time high, with the annual market reaching $4.5 billion in 2022. Shockingly, that same year, 9,000,000 policies lapsed compared to the 3,000 settled, revealing a significant industry disparity in leveraging these assets. For these policy owners, the life settlement option resulted in 7.8 times higher payouts than the available cash surrender value (or in the case of term life policies, no CSV at all). As the market continues to grow the upside is enormous with Senior-owned life insurance accounting for a staggering $230 billion annually that could potentially qualify for a life settlement—a potential financial windfall that seniors and advisors should not ignore.
Life Settlement Annuities
The life settlement annuity is an ideal way to help people overcome retirement driven fears. By accessing the higher market value of an unneeded or unwanted life insurance policy through a life settlement, the policy owner can leverage its full market value with a seamless rollover into a mix of annuities specifically created to address financial challenges driven by aging and declining health.
First, annuities offer guaranteed rates of return, financial protection from market volatility, tax advantages, income for life, and ongoing income for spouses and beneficiaries. They can also be set up to provide tax-advantaged income and income acceleration for qualified long term care services.
Second, a life settlement is the sale of an existing life insurance policy and is designed to reward policy owners with higher value as the insured gets older or sicker. Life insurance policies are legally recognized as assets and life settlements are a way to unlock the hidden value in an unneeded or unwanted policy—just like when a homeowner sells their home if they are no longer going to live there. This is a way to access liquidity for retirement income, health or long term care needs after years of paying premiums.
By combining these two transactions into a life settlement annuity, the funds realized through the life settlement are rolled over into an annuity that can be underwritten to provide higher value relative to an individual’s age and health than would be received through a standard annuity. Also, according to industry statistics, life settlements can generate five to 10 times higher payouts than cash surrender value to rollover into an annuity. Based on the form of life settlement annuity selected, the policy owner can create a guaranteed income stream for life, increase monthly payouts through an underwritten SPIA, benefit from guaranteed returns and tax-deferred growth with a FIA, and, in the case of a need for long term care, increase the value of the funds in the annuity two to three times with a unique long term care rider.
Types of Life Settlement Annuities
- Impaired Risk Single Premium Immediate Income Annuity (SPIA): Underwriting based on life settlement life expectancy data increases monthly payouts over standard risk scenarios. This SPIA option provides lifetime income, survivorship benefits, and a return of premium option.
- Multi-Year Guaranteed Annuity (MYGA): MYGA offers a guaranteed rate of return over a set period, allowing clients to choose from a two, three or five year rate guarantee period with optional free withdrawal benefits. A five year guaranteed rate of return at six percent or more ensures a steady income draw equivalent with the principal remaining.
- Long Term Care Based Fixed Index Annuity (FIA): FIA provides financial resources for long term care services, offering a guaranteed rate of return at five percent and an enhancement rider option to pay for long term care benefits by increasing the principal up to two or three times tax-free.
Life Settlement Annuities harness the untapped market value embedded within life insurance policies, allowing policyholders to extract five to 10 times more value than the cash surrender value of their policies—a potential game-changer for those facing lapse or surrender.
Moreover, life settlement annuities create multiple income streams for agents via referral fees, annuity commissions, and potential term conversion commissions. These financial instruments not only reward seniors for their age and impairments, but also offer liquidity to meet health and long term care needs without ongoing premium obligations.
Conclusion
As the U.S. population ages, the financial challenges associated with retirement and declining health become more pronounced. Agents in the life insurance industry are uniquely positioned to address these challenges by introducing innovative solutions like life settlement annuities. These annuities offer a lifeline for seniors—providing liquidity, tax-advantaged income, and unlocking hidden asset value in the form of illiquid life insurance policies. By embracing these solutions, agents can not only provide invaluable support to senior clients but also create new income streams for themselves in the process. In the evolving landscape of retirement planning, life settlement annuities stand out as a powerful tool to help seniors live out their retirement years with financial security and peace of mind.
