Traditionally, life settlements – the sale of an unwanted or unaffordable life insurance policy for substantially more than the policy’s cash surrender value — have significantly benefitted seniors by providing them with resources to help pay for rising health care costs, medical bills and other needs in retirement.
(Related: Where the Life Settlement Business Is Now — And Where It’s Going)
For a policy to have value in a life settlement, the insured person under the policy typically needed to be in their mid-to-late 70s and have had a decline in health since the policy was first issued. Health impairments such as diabetes, heart disease, cancer or other serious medical conditions were often necessary in order for the policy to be sold.
But now, even healthy seniors – those whose health has not significantly declined from when they first took out the policy – have the option to sell their policies and generate income that can be used to invest in their retirement or pay for anticipated healthcare, long-term care, and other future expenses.
A healthy senior can qualify for a life settlement by meeting three criteria:
- The policy must be a guaranteed universal life (GUL) policy.
- The insured typically must be age 75 or older.
- The policy’s death benefit must be at least $250,000.
A policyowner who meets these criteria can receive an offer to purchase the policy without the need for a medical record review or underwriting. Offers to healthy seniors are usually made within 24 hours of receipt of the required information from the buyer.
This is good news for healthy seniors with GUL policies when compared to traditional life settlements. First, they wouldn’t typically even qualify for a life settlement. Second, traditional life settlement transactions take several months to complete because of the need for comprehensive medical record collection and review, along with a detailed analysis of the policy. Healthy seniors are amazed at how fast and easy it is to sell their policy and receive the funds.
At Lighthouse Life, even when a life settlement transaction requires medical underwriting, we significantly shorten the process of assessing the health status of the insured with a quick telephone health interview. Our time to complete the transaction and get the life settlement proceeds to the seller is usually several weeks, not months.
What is the Benefit for Clients?
In most traditional life settlements, the policyowner is motivated to sell a policy because of a need for resources to pay for health or medical expenses. But if the policyowner is healthy, there are still several reasons for them to pursue a life settlement.
For one, regardless of the insured’s health, policy premiums may have become too expensive. Seniors are often concerned about outliving their retirement assets and might choose to lapse or surrender their life insurance as a way to generate and stretch out their assets. Healthy seniors now have the option of selling their policy, which typically yields a payout four or more times greater than the policy’s cash surrender value.
Recent changes in estate tax laws provide another reason for a healthy senior to consider a life settlement. Over the years, many people purchased GUL policies because federal estate tax laws levied a “death tax” on estate assets of $2 million or more, imposing federal estate tax liabilities upon the death of a spouse or parent. GUL policies were frequently purchased as a way to provide tax-free death benefits to be used to pay these estate taxes and protect the value of the decedent’s estate. Estate tax law changes – including most recently in 2017 – have significantly increased the amount of assets exempted from estate taxes and, therefore, significantly reduced or eliminated the exposure to estate taxes for millions of America
Finally, there are times when a GUL policyowner’s loved one is dealing with serious health issues resulting in burdensome medical or long-term care costs. In such circumstances the GUL policyowner could sell the policy to generate resources to help cover the expense of their loved one’s care.
Despite the millions of seniors who could benefit from the retirement resources generated from a life settlement, public awareness of this valuable financial planning option remains low among senior policyowners, as well as financial professionals. Even those familiar with life settlements often believe the insured must have poor health to sell their life insurance policy. While that may have been the case, it no longer is .
Life settlements are a practical, hassle-free way for healthy seniors to generate assets and income during retirement.
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Ted Kilkuskie is senior vice president, business development, at Lighthouse Life, a life settlement firm in Conshohocken, Pennsylvania.