Living Benefits From Your Life Insurance Policy & Life Settlements

Benefits business concept - benefits word and red pen. 3d rendering

Life insurance policies and benefits continue to evolve and change.  Here are some of
the newer types of LIVING BENEFITS available depending on the type of life insurance purchased.  The insurance companies have listened and responded to the needs of the consumer to deliver benefits that make sense.  Some are included for free and others require an additional cost.  

These LIVING BENEFITS allow you to receive benefits from your policy during your lifetime and have the remaining life insurance face amount paid to a beneficiary at the end of life.  

ACCELERATED DEATH BENEFIT is available in most types of life insurance policies and is included in the premium you are paying for the life insurance policy.  It is usually provided without a cost other than a small charge as indicated in your policy at the time of a claim.  The accelerated death benefit advances to the insured / owner a percentage on average between 50 and 75 percent of the face amount of the life insurance policy subject to a maximum dollar amount in the event the insured is diagnosed with a terminal illness and has a life expectancy of less than one year.  The actual percentage and maximum amount allowed are different depending on the insurance company.

CHRONIC ILLNESS OR LONG-TERM CARE BENEFIT allows you to use a percentage of the policy’s death benefit for long-term care services.  Read the fine print closely.  This benefit requires an additional cost.

CRITICAL ILLNESS BENEFIT allows for a stated dollar amount should you suffer a diagnosed a dreaded illness such as cancer, heart attack, or stroke and survive.  The actual benefits and maximum dollar amount allowed is different depending on the company.  Read the fine print closely.  This benefit requires an additional cost.

WAIVER OF PREMIUM is an optional benefit and your life insurance premium is waived and paid by the insurance company should the insured suffer a total disability that lasts more than six consecutive months and occurs prior to age 60.  The waiver of premium cost usually drops off the policy at age 60 or 65 depending on the company.  This benefit is available on term and permanent life insurance policies.  This benefit requires an additional cost.

While some of these LIVING BENEFITS are new, not every insurance company offers them
in their life insurance portfolio of products and they are not approved in every state.

Settlement Statement Form Financial Concept

ANOTHER LIVING BENEFIT
THAT CONTINUES TO EVOLVE
ARE LIFE SETTLEMENTS

Settlement Check Agreement Payout Word 3d Illustration

LIFE SETTLEMENT is an option that allows the sale of a life insurance policy to a financial institution (the buyer) rather than allow it to lapse in a transaction called a “life settlement”.  The insured / owner receives an agreed upon cash payment in exchange for their life insurance.  The financial institution continues to pay policy premiums and collects the full amount of the life insurance policy when the insured / owner passes away.  

Remember the amount received for a life settlement varies depending on the life expectancy of the insured / owner at the time of sale, and the ongoing premiums paid by the financial institution necessary to keep the policy in force.  Think the worse your health.  The more a financial institution (the buyer) is willing to pay for your policy.  Would you rather pay premiums on someone whose life expectancy is 2 years or 20 years?

WHY WOULD ANYONE WANT TO
SELL THEIR LIFE INSURANCE POLICY?

Life insurance is a valuable asset, but over time, your personal situation can change and you may find for many different reasons your life insurance policy is no longer necessary and providing a death benefit to a designated beneficiary is not needed.   

You can sell all or part of a life insurance policy you no longer need or can’t afford for cash to use any way you want e.g., supplement retirement or additional living expenses, pay down debt, pay for additional medical expenses or long-term care costs.

Life Insurance

Most consumers (insured / owner) do not or did not know that they can sell their life insurance policy – so it comes as a big surprise when in the RIGHT SITUATION they can sell a policy and realize potentially thousands of dollars more for it (over and above any existing cash value) or if its a term life insurance policy and the conversion option is still available.  It might also qualify for a life settlement.  

Prior to the existence of the life settlement market, the insured / owner received little, if any, economic value from life insurance policies they no longer wanted, needed or could not afford and policies lapsed.

Similar to other assets, the secondary market for life insurance provides liquidity while adding tremendous value to life insurance policies that were perceived to be illiquid and of limited value, therefore creating a greater liquid cash asset.  

WHEN WOULD YOU CONSIDER SELLING YOUR LIFE INSURANCE POLICY?

Most of the situations where the insured / owner would consider selling a life insurance policy will fall into one of the three following categories:

(1) The insured / owner can no longer afford the cost of life insurance.

(2) The insured / owner needs additional cash liquidity for some other expense.

(3) The insured / owner no longer needs the life insurance coverage.

Unaffordable Premiums: Premiums can become unaffordable for two reasons.  Either the financial situation of the insured / owner changes and they cannot afford premiums they expected to pay.  Premium cost escalated as the insured aged – a common feature of universal life insurance policies due to declining interest rates, underfunded policy premiums, or increasing mortality costs to keep the life insurance in-force.  

Needs Cash Liquidity for a Number of Reasons: A common expense is a large and/or ongoing medical cost.  Another example is if the insured’s retirement account is underfunded or if the insured wants to help pay for a grandchild’s college education.  The insured may also decide on improving their retirement standard of living.  

Unneeded Coverage: Here are a few examples…

An insured / owner purchased a permanent life insurance policy years ago to protect his children.  It turns out his kids are self-sufficient and doing well financially.

Health declines and you require significant medical treatment.  Rather than burdening his children for money, he considers surrendering his policy to pay the medical bills.

A married couple purchased life insurance policies and named the other as the beneficiary.  After many years, one spouse passes away.  The living spouse collects the policy benefit but still has a remaining policy with no one, in particular, to name as the designated beneficiary and has additional cash needs.

Two business partners executed a buy-sell agreement funded with a life insurance policy so that the survivor could carry on the business in case one of the partners passed away prematurely.  However, the business ends so the buy-sell agreement and its life insurance policy is now irrelevant and no longer needed.

A couple with no kids purchased a policy while they were married.  After a number of years, they divorce and the individual that owns the policy post-divorce no longer has a need for it but has additional cash needs.

WHO QUALIFIES FOR A LIFE SETTLEMENT?

Several different factors must be considered with the most important being age, health, policy size, and policy type.  Qualification is based on the financial institution (the buyer)  willingness to pay for the policy and how much economic value to them is in the policy.

Ideal candidates for life settlements are seniors, age 65 and older.  Age and health are important factors because the insured’s life expectancy is the most important variable in calculating a life settlement offer.  In general, the shorter someone’s life expectancy, the more valuable the life settlement offer will be.  Thus, older individuals who naturally have shorter life expectancies tend to have more valuable policies of greater interest to investors; similarly, individuals who are younger than 65 but have a serious illness (and therefore reduced life expectancy) may also have policies that qualify for being purchased.

Health declines and you require significant medical treatment.  Rather than burdening his children for money, he considers surrendering his policy to pay the medical bills.

Policies must also have been owned for a minimum number of years.  The exact required number of years varies on a state by state basis.  For instance in California, it is two years.  This is to prevent individuals from taking out a policy for the sole reason of selling it.  Numerous questions are asked on a life insurance application if you intend on changing the owner or selling the policy in the future.  Some exceptions can be made to this minimum ownership period rule if there has been a material change in the insured’s life, such as divorce, retirement, the death of a spouse, etc.  Again these exceptions vary on a state by state basis.

Finally, the policy is usually a universal life or a term life insurance policy that is convertible into one of those types of permanent policies.  Premium financed policies generally do not qualify for life settlements, because of the additional risk to the financial institution (the buyer).  Some group life insurance policies can also qualify if they are permanent or convertible term policies.

UNDERSTANDING THE FINANCIAL INSTITUTION (THE BUYER)

After all, in the hands of a financial institution (the buyer), a life insurance policy is simply an “investment” that has ongoing cash flow requirements (premiums), which will eventually mature as a (much larger) death benefit later.  So as long as the time horizon is “reasonable”, the policy can actually have a remarkably appealing implied rate of return to the financial institution, for which they can be paid.  

Ironically, the biggest caveat of engaging in a life settlement is the reality that any life settlement policy worth selling to an investor is worth even more in the long for the policy owner to just keep themselves, where the internal rate of return will be even more appealing (since the investor has both transaction costs to acquire the policy, and does not enjoy the death benefit tax free as the original policy owner would).  Nonetheless, for the insured / owner who simply doesn’t want to – or can’t afford to – keep the policy in the first place, a life settlement may be a more appealing exit than just letting the policy lapse away or surrendering it for the policy cash values.    

FYI abbreviation letters or acronym in thought clouds arranged i

In 1911, the U.S. Supreme Court, issued a landmark decision in the case of Grisby vs. Russell, which recognized the rights of the life insurance policy owners to transfer ownership of their life insurance policies to a third party, who happened to be unrelated to the policy owner or insured and who did not hold an insurable interest in the policy owner or insured.

I refer to the insured / owner as being the same in this section for life settlements.  The owner controls the rights to the policy and in some situations, the owner may be different than the insured.  The owner would need the permission and cooperation of the insured should a policy be considered for a life settlement.

NOTE: You need to carefully consider your personal situation, understand
all of the details and tax consequences before considering a life settlement option.

Marc Maretsky Personal Insurance Services based in Beverly Hills, serves all of California and the United States.  I help my clients acquire life, disability, long-term care, and critical illness insured solutions, as well as enroll them into Medicare when eligible.

“No matter how fast technology changes our world and everything around us.  I believe the personal touch and a human voice are more important than ever.”

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