The Comprehensive Advisor
Life settlements have long been a confusing or misunderstood option for financial advisors. A big part of the confusion is due to the lack of education that exists on the topic. At The BluePrint, our commitment is to help you be a more comprehensive advisor. Our goal is to educate you on topics like life settlements, so you can have confident client conversations when the need arises. In this month’s The Comprehensive Advisor Newsletter we address life settlements with the goal of addressing what they are and helping you identify opportunities that may exist for your clients.
What is a Life Settlement?
A life settlement is the sale of a life insurance policy to a third party for a value in excess of the policy's cash surrender value, but less than its face value, or death benefit. A life settlement should be considered a viable option when conducting a policy review and identifying exit strategies for current life insurance policies. With new tax law changes (both estate tax and tax treatment on the sale of a policy) and increased competition in the marketplace, the settlement marketplace is as seller friendly as it has ever been. More and more hedge funds, pension funds, etc. are entering the marketplace searching for an uncorrelated asset class. The increased competition has forced buyers to target lower returns which have increased the value of life insurance policies in the marketplace.
When Should You Have the Conversation?
We all know that people are living longer. The 80+-year-old market is one of the largest growing demographics of the population. Longevity is a blessing, but this also means people are outliving their life insurance policies due to a combination of policy underperformance and policies originally funded to last until age 85 or 90. We think it is important to review your clients’ policies regularly especially after the age of 70. Clients often purchased life insurance when they were younger for family protection or for estate taxes and have now built significant cash value or have a conversion option on a term policy. They may no longer need the protection. They do not want to pay premiums any longer and want to know their options. The life settlement conversation may fit as part of their options. We have seen life settlements work for clients age 65- 85.
What is The Process?
Most clients are not familiar with the concept of a life settlement, but we have developed a process that focuses on transparency and allows us to maximize policy values. The process starts by completing a pre-pricing analysis. In order to initially price a policy, our strategic partners require a general idea of the insured’s health and an in-force illustration to carry until age 100. This is the most important part of the process as it helps manage client expectations.
Once it is determined the client would like to move forward, we compile medical records and order life expectancy reports. After receipt of the life expectancy reports, the case is then sent out to every licensed buyer in the specific state where the contract was issued. The case is shopped using an auction format to extract every last dollar of value on the open market. The process typically takes 90 days depending on how fast we can collect medical records. The process focuses on transparency and disintermediation.
A Case Study: Why Would a Client Consider a Life Settlement Option?
We had a male client age 73 that had a $1.5MM term policy where the term period was about to expire. Even though it was a term policy it had an option to convert to a permanent policy with no new health underwriting required (this is called Convertible Term.) The conversion premium was $98,000 per year and the client could not afford the increased cost. The client had a history of heart disease and his life expectancy reports ranged from 7.5 to 11 years. The case was taken out to market and the initial offer received was $200,000. However, after completion of the auction process the final amount net to the client was $495,000. This sale made a positive impact on the client’s life. He took a policy he and his advisor deemed worthless or a liability and was able to turn in into a significant windfall for him and his family. These opportunities exist in an advisor’s book of business. To find them starts with asking clients if they own insurance policies and then partnering with a firm like The BluePrint to conduct a needs analysis and policy review.
Helping you is our primary focus. If you would like to review any of the topics above, please contact us at 855.204.6353 or visit us at www.tblueprint.com.