SENIOR LIFE SETTLEMENTS: A GUIDE
The Basics of Senior Life Settlements
Senior life settlements describe a sales transaction between a life insurance policy owner and an investor. Typically, a life insurance broker serves as an intermediary between the buyer and the seller. After the sale, the investor or investment group becomes the new beneficiaries and owners of the policy.
These investors will then have to take responsibility for paying any premiums due. Basically, the buyers hope to make a profit by investing in the policy’s death benefit. Life insurance owners and their families might agree that they can benefit more by taking cash now and not having to pay premiums than by waiting for the insured person to pass away.
Before you decide if you and your family can benefit from a senior life settlement, you should take some time to explore your options and learn how life settlements work.
Senior Life Settlements Vs. Viatical Settlements
Sometimes, even professionals in the business use viatical settlement as a synonym for a senior life settlement. Actually, a viatical settlement only describes a specific type of senior life settlement. This briefly describes the difference:
- Viatical settlements occur only if the insured person already has a terminal illness and typically isn’t expected to survive more than two years. The life insurance policy may have a living benefit rider that allows the the policy holder to settle with the life insurance company in these cases. Policy owners may want to sell their policies before they die because they need the cash for personal or medical care.
- Life settlements usually involve people over 65 who hold a whole, universal, or convertible term life insurance policy with a face value of at least $250,000. Convertible means that the the life insurance company has offered an option to convert the policy from term to permanent life insurance. The insured person may have a relatively long life expectancy and still qualify for a senior life settlement. In any case, these sellers don’t have a terminal illness that qualifies them for a viatical settlement.
In any case, most of this article concerns itself with standard senior life settlements and not viatical settlements. Viatical settlements are really a different topic because they are often included as a policy rider and are handled by a highly regulated life insurance company. Standard life settlements don’t involve the life insurance company in the transaction. Investors and brokers handle them.
Why Consider a Senior Life Settlement?
Why would you want to sell your life insurance policy? When you purchased it in the first place, you probably hoped to use your life insurance mainly as a tax-advantaged way to leave money to your heirs. If you bought a cash value policy, you may have also hoped to use it to store some value that you could borrow against or surrender to the insurer. If you decide to sell your life insurance policy, you will give up some or all of these benefits in exchange for cash.
With a senior life settlement, you should get an offer that is somewhat more than the policy’s surrender value and less than the policy’s face value. You have to decide if that cash settlement will benefit you and your beneficiaries more than waiting to collect the death benefit or finding an alternative way to solve a financial issue.
Do You Need the Cash for Retirement Income?
Even people who enjoy comfortable retirements probably won’t tell you that they had an easy time making good retirement plans. Right now, Americans enjoy an average life expectancy of over 78 years. The interesting thing is that the older you are, the longer statisticians expect you to live.
Average Life Expectancy of Americans (Years)
A survey that found older Americans had more concerns about running out of cash than of passing away.
If you're a man & 65...
You can expect to reach an average age of 84
If you're a woman & 65...
You can expect to celebrate your 86th birthday
While you should certainly celebrate a chance to live a long and productive life, you should also realize that it’s difficult for many people to make good financial plans for decades into the future. Before retirement, many people purchase life insurance policies to leave cash to their beneficiaries. Life insurance policies provide people with a good way to transfer an estate.
At the same time, life insurance policies could represent an extra expense, and they won’t provide any benefit to the insured people but only to their beneficiaries who will get the cash proceeds after their loved one passes away. As time passes during retirement, some families or individuals decide they can benefit from the proceeds of a senior life settlement.
How Can You Tell if a Senior Life Settlement Is Best for You and Your Family?
The Motley Fool reported on a survey that found older Americans had more concerns about running out of cash than of passing away. If you couldn’t predict the cost of housing, fuel, and food now when you were twenty years younger, you also probably can’t predict them twenty or thirty years in the future. In other words, if you have concerns about your retirement income, you certainly are not alone.
Your beneficiaries may not need the extra income from your death benefit as much as you could use the cash that a broker might pay you for a life settlement transaction. You could use the proceeds to pay immediate expenses, fund a retirement account, and handle debts. In fact, having the cash from the transaction might benefit your family too; otherwise, the cost of your care might impact their finances. In some cases, you may be able to leave your beneficiaries a smaller death benefit too.
Who Offers Senior Life Settlements?
If you’re interested in selling your life insurance policy, you should spend some time learning how life settlements work and who you should work with. Since you want to sell a valuable asset, you should make certain that you work with qualified professionals.
Finding Life Settlement Brokers
You could first find a life settlement broker from the list on the Life Insurance Settlement Association website. This organization vets its members, and it also requires each broker to agree to a code of ethics and bylaws. These vetted brokers can shop the market to get the best offer for your policy.
You could also find out who will oversee the transaction. Since quite a bit of money could be involved, expect a CPA, financial advisor, insurance professional, or even an attorney to get involved. Regulation of life settlement brokers can vary by state. You can check with your own state’s insurance department to find out about required licensing and to ensure that your own broker has a license. You can also use the LISA link above to see if the parties involved in the transaction have registered. You may find it prudent to bring your own lawyer or CPA into the transaction before you sign anything.
Who Qualifies for Senior Life Settlements?
Generally, you must have already turned 65 years old. Some investors may only want policies that have been held for at least two years because that’s the length of a standard contestability clause. Of course, you also need to hold a permanent life insurance policy, like whole or universal life, or you must have a term policy that you can convert to a permanent policy without having to show evidence of insurability. This means that you won’t need to undergo health underwriting to covert the policy. Investors may only have an interest in insurance policies with a death benefit of at least $250,000.
For a life settlement, you should have a life expectancy of two years or greater. People who have a shorter life expectancy sell their life insurance policies as a viatical settlement and not a standard senior life settlement.
Different Types of Life Settlements
Besides viatical settlements, you can also look for different kinds of senior life settlements. You should know that some states don’t allow all kinds of settlements. You can ask a broker or your state insurance department about the options available where you live.
These are types of life settlements that you should know about:
With the hybrid option, the investor and seller can agree to some combination of a traditional and a retained death benefit. The seller still gets some cash at the
The investor or investment company takes full ownership of the policy. They will name themselves as full beneficiaries and take responsibility for paying the policy premiums. Since the original policy owner received a cash settlement, that person’s beneficiaries won’t get any benefit from the policy when the insured person passes away.
Retained Death Benefits
This option relieves the original owner of paying premiums any longer, but he or she also won’t receive any cash upon completion of the transaction. Instead, the original beneficiaries will still receive a portion of the death benefit, and the investor will receive another portion. You might consider this kind of settlement if you still want your beneficiaries to get a death benefit, but the expense of maintaining the policy has become a burden.
As you can see, you don’t necessarily need to decide that you have to completely remove beneficiaries from the life insurance policy in order to settle with investors. The hybrid or retained death benefit may offer your family a good compromise that can still reduce expenses and even provide income without totally giving up the death benefit of the insurance policy. Once you choose a broker, you should let that professional know which type of life settlement you’re most interested in.
Major Concerns Over Senior Life Settlements
Your most obvious concern over deciding to sell your life insurance probably includes some reluctance to remove beneficiaries from a life insurance policy. Typically, the government doesn’t tax a death benefit, so that’s one reason people choose life insurance as a way to transfer money to the next generation. Besides this loss of an inheritance, you should also consider also issues that may impact you finances right away:
If you’re considering a senior life settlement, you should probably schedule a visit with an accountant. While you might be able to deduct the premiums paid for the life insurance policy in the past, some of your proceeds are probably taxable. Your accountant should provide you with advice about ways to minimize the tax impact. Still, you must consider any tax implications of receiving a large cash settlement.
Since at least part of your cash settlement may count as income, you should consider any income-based programs that you may qualify for. Naturally, this sudden cash infusion can change your income for the year quite a bit.
FINRA serves as a nonprofit organization that Congress authorized to protect investors. In that capacity, they have published some other cautions for people who are considering a life settlement:
- Confidentiality: Make sure that your purchaser has included information about how they will protect your privacy. When you apply for a settlement, you may have to offer them health information. In addition, you should make certain that the broker or investment group won’t information about the transaction.
- Licensing: Not every state requires a specific license for life settlement brokers, so you should find out what your state requires. If the broker isn’t specifically licensed for life settlements, you should find out what other licensing and experience make him qualified to handle your deal.
- Transaction costs: When you purchased your life insurance, the insurance company paid your agent a commission. Similarly, brokers and other middlemen may charge fees, and sometimes these can range as high as 30 percent. In addition to having a broker shop around for the best deal on your transaction, you might also compare various broker fees.
- Disclosures: In some states, brokers don’t have to disclose their relationship with the buyers or other agents involved in the deal. You can’t always be certain that your broker is acting in your own best interests. You should definitely ask them to disclose any relationships they have with other parties. In many cases, it’s a good idea to pass offers through your own lawyer or CPA.
- Broker motivations: Some brokers may offer to sell you a smaller and more affordable policy to replace your old insurance. In this case, brokers stand to gain two commissions. They get one for the life settlement and one for selling you a new policy. Since you’re now older than you were when you bought your first policy, you can bet that your cost of insurance will have risen. Even if the premiums seem cheaper, you will buy less coverage at a higher rate per unit of coverage. Your original insurer may offer you a better deal if you want to reduce your coverage just to lower premiums.
Senior Life Settlement Alternatives
Before you sell your life insurance, you should clearly define your rationale and the potential income the transaction will have upon you and your beneficiaries. These are some steps you might take to explore different alternatives to senior life settlements:
- You are always free to shop around for offers without actually accepting one.
- You can consult with your own accountant or financial advisor to learn more about the financial implications of the sale.
Once you understand the impact the sale will have, you might also consider alternatives to a senior life settlement that will have less impact or work out better for you in the long run.
Learn What Alternatives Your Life Insurance Company Can Offer You
For example, you might consider a senior life settlement because the premiums have become a burden or you face an unexpected expense.
Your life insurance company may have some helpful suggestions:
- If you already own a permanent life insurance policy, you may be able to borrow against the cash value in a very favorable way.
- Your insurance company may also allow you to decrease the policy face value to lower premiums.
- In some cases, you could let the cash value pay the premiums for awhile. This could give you time to decide if you really need a senior life settlement.
- In some cases, the cash value may be sufficient to pay off a smaller policy, which might be a better option than a sale and replacement policy.
- If you’re not sure about your options, you should call your insurance company for help.
Ask Beneficiaries to Help With Premiums
If premiums have become a burden for the seniors who are covered, adult children may be willing to help with the bill. After all, if these adult children are also the policy beneficiaries, they are the ones who stand to gain the most from the death benefit. There’s no rule that that the insured person has to pay the premiums; they just have to get paid.
In any case, you should remember that selling your life insurance policy with a senior life settlement will be a permanent decision, so you might not need such a permanent decision for a temporary problem. In some cases, having the beneficiaries take over ownership of the policy offers a better solution than selling it to third parties.
Sell Another Asset
Typically, people who own large, permanent life insurance policies have sizable net worths. Of course, all of these assets may not be liquid. For instance, the policy owner could have money tied up in a home or business. Still, if financial problems have caused you to explore senior life settlements, you might also consider selling other assets to solve the problem. For instance, you might decide to downsize from a large home into an apartment or smaller home in order to gain more cash and reduce expenses. It’s better to consider the pros and cons of various solutions before deciding that a senior life settlement offers you the best option.
How Much Money Can You Get for Your Life Insurance Policy?
Of course, the only real way to know how much value investors will give your life insurance is to shop around for offers, Again, remember that you are never required to accept an offer. If a broker or buyer applies too much pressure, that’s a sign that you should probably decline the deal. Compare shopping for a price for your life insurance to any other situation when you want to sell a large asset. You don’t have to accept offers to buy your home or business, and you don’t have to accept offers to buy your life insurance.
In any case, investors will offer more than the policy’s surrender or cash value. At the same time, they will offer less than the face value of the policy. Obviously, they hope to profit off of the deal when they do collect the death benefit. The amount they will offer will depend upon the insured person’s age and health.
In this way, investors may underwrite the deal in a sort of reverse of the way that life insurance companies underwrite in the first place. Typically, life insurance companies offer cheaper rates for customers with longer life expectancies; however, investors will offer greater sums for prospects with shorter life expectancies because the investors can expect to collect faster. Investors may ask for medical records and even a medical exam before they make an offer.
These are some typical life settlement payout estimates based upon the age of the insured person:
At Age 50
You might expect to get offered about 16 percent of face value. Generally, investors only want to buy policies from people who are at least 65.
At Age 65
Expect to get offered about one-quarter of the face value. If you have death benefit of $1 million, you may get offered about $250,000.
At Age 80
You might expect to get offered slightly over half of your policy’s face value. So you may get offered about $500,000 for your policy with a face value of $1 million.
These estimates don’t include any transaction fees. These transaction fees can considerably reduce the amount of money that actually goes into your pocket. To find a good deal, you should also learn what your broker and other involved parties charge.
Of course, investors may also ask health questions to learn if your life expectancy may be shorter or longer than average. It’s sort of grim to think about, but less healthy people may get offered more money than healthy people. Again, a good broker should help you compare various offers to find the best deal. Also, remember that you may arrange different kinds of senior life settlements that can allow your beneficiaries to retain some of the death benefit, and these different arrangements may impact your cash offer.
Recall that if the insured person already suffers from a terminal disease that will be considered a viatical settlement, which is somewhat different and often arranged through the living benefits rider of the insurance policy.
Is a Senior Life Settlement in Your Best Interest?
The reality of life settlements is that you will sell your life insurance to an investor who will then have a financial interest in your demise. Let’s say you sold your $1 million universal life policy for $300,000. After you deduct fees and costs, your actual proceeds may be considerably less. The investor will collect the $1 million upon your death.
That doesn’t mean that the investor will suddenly start sending you sugary snacks or cigarettes, but it is a bit creepy to think about. Even though at least one author wrote a novel about an investor who tried to hasten the demise of insured people, the president of the Life Settlement Association, Darwin Bayston, said that only three people had filed formal complaints with federal agencies against life settlement companies within the past three years.
On the other hand, both you and your family may benefit more from collecting cash now than waiting. You can also get relieved of the burden of paying premiums. In some cases, you may use some of the proceeds to handle urgent financial needs and still put the rest to work to provide some finances that you can pass onto your heirs. While you may not like the idea of giving a third party some interest in your death, you may benefit from the deal. If the cash can help you improve your medical or personal care, it may help you improve your life and even live longer.
Is it Time to Explore Senior Life Settlements?
You should try to approach your consideration about this type of financial transaction in a very logical way. After you learn how much you can get for your insurance policy, you should decide if you can use the cash in a way that will benefit yourself and your family more than waiting for the death benefit. Your own beneficiaries may lose some or all of the death benefit; however, your loved ones should also have an interest in your comfortable lifestyle while you are alive. On the other hand, you should not rush into a decision like this, and it’s a good idea to engage your own personal representative, like a lawyer or CPA, to make sure you’re protected.