Many agents have never spoken to a senior client about life settlements. Why so little interest in this valuable financial planning tool? For starters, not every agent is allowed to discuss the life settlement option with a client. Insurance company or broker/dealer prohibitions close the door for these agents even though a life settlement may be in the client’s best interest. Let’s examine some other possible reasons.
Reason #1 – “I am not familiar with the life settlement concept.”
Agents need additional training in these transactions to feel comfortable discussing them with senior clients. Continuing education has not been available until recently. At least two life settlement providers have training programs approved in some states. Industry training has been available for some time. It is incumbent upon life settlement brokers and providers to offer training programs. The key is developing relationships and providing a turnkey solution, including compensation.
Reason #2 – “I’m waiting for the issue to come up.”
A client may complain about the annual life premium he just received in the mail, but he probably never heard of a life settlement if you haven’t brought it up. Traditional mass media outlets don’t cover life settlements. Business editors and producers appear to be confused by the concept or have a vague memory of people losing money in viatical (terminal illness) settlements. The effect of this news blackout is that the senior never hears the term “life settlements” and doesn’t know to ask the question to the insurance agent.
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The sad truth is that many seniors are orphaned policyholders with no servicing agent. Their only contact is with the issuing company, virtually ensuring that there will be no chance of being presented the life settlement alternative. If you are in front of a client who may qualify for a life settlement, simply ask, “Has your life insurance policy been reviewed recently?” That question will be worth its weight in gold.
Reason #3 – “I manage assets. I don’t do insurance.”
This is a common objection from broker/ dealer financial advisors who don’t understand that an insurance policy is an asset to be managed like a mutual fund or stock and bond portfolio. If you are a wealth manager and don’t understand your client’s life insurance holdings, you may be putting other assets at risk. Not all investments perform as intended. Poorly performing investments are often sold and replaced by other investments. A life insurance contract may also perform poorly. Perhaps, at inception, the policy illustration was shown with a projected rate of interest that is no longer attainable. The scheduled premium may no longer support the illustrated cash values or even the death benefit.
An insurance agent or financial advisor should perform an annual policy review with current ledger illustrations to make sure that policy premiums are adequate to maintain projected cash values and the death benefit. The policy review will also raise the issue of whether the coverage is adequate. Policy management also addresses the issues of replacement, insurability, and possible tax consequences.
Reason #4 – “I prefer to recommend a 1035 exchange for replacement.”
This objection tells me that the agent does not understand the value that a life settlement creates or the tax consequences. Nearly half of all life settlement proceeds go into acquiring new policies, according to the Life Insurance Settlement Assn. If new insurance is to be acquired, is a 1035 exchange better than a sale in a life settlement transaction?
There are no current tax consequences to a 1035 exchange. The basis in the old life contract is transferred to the new contract and the old policy is traded in at cash surrender value to acquire the new policy.
In the sale of a life insurance policy, there may be a tax consequence upon sale if the proceeds exceed the cost basis. However, to make the comparison fair, the after-tax proceeds must be compared to the existing policy’s cash surrender value. No taxpayer is in the 100% tax bracket. Also, incremental after-tax gains via sale are almost always greater than the cash surrender value. By definition, a life settlement must be greater than cash surrender value. This means that a qualifying senior has more money at their disposal to acquire a new policy. Historically a life settlement runs an average of 200% to 300% greater than cash-surrender values. While every case is different, comparing 1035 exchanges to a possible life settlement is the right way to approach policy replacement.
Reason #5 – “I don’t understand how fair market value is created.”
As mentioned earlier, there is an enormous spread between a policy’s cash surrender value and fair market value. In real estate, the buyer and seller negotiate fair market value. The seller lists at one price, the buyer counters with a lower price, and the selling price is somewhere in the middle.
Contrast that with the competitive bidding process in the secondary market. The highest bidder gets to present a life settlement offer. Wouldn’t it be nice to have 10 potential buyers bidding on your house the way they bid on your life insurance policy? A policy’s cash value represents the bid of one buyer – the issuing insurance company. Do you think this valuation would be higher or lower than competitive bid?
A health arbitrage also creates the valuation gap. Insurance policies are priced based on the insured’s age, sex, and health at the application date and subsequent health changes cannot be anticipated or accounted for. A buyer in the secondary market looks at the insured’s current health and how health issues affect life expectancy. There is an inverse relationship between policy valuation and life expectancy.
Reason #6 – “I’m not sure how to market this product.”
The market for life settlements is the senior who is generally 70 or older with a health issue that has developed since the policy application date. Institutionally funded life settlement providers buy policies on an insured with a two-year to 12-year life expectancy. Direct marketing to seniors whom you do not know may be ineffective.
A financial seminar can be an opportunity to discuss these transactions to the right audience as long as there are other topics on the table. It is much too narrow a topic to be the focal point. Not every senior owns a life insurance policy, not every policyholder qualifies, and not everyone is interested in disposing of a policy. The life settlement topic makes a good bullet point on a seminar agenda with a brief mention that it is a new idea that could generate cash from a dormant asset.
If senior seminars are not for you, there are other marketing ideas to consider. Approach CPAs, estate attorneys, and trust officers in your network about life settlements, positioning yourself as an expert. Chances are that they have never heard about life settlements or they are only slightly familiar with them. You will add value to their service offerings and will introduce them to a new concept, putting yourself in a favorable referral position.
Mention that corporate-owned policies and trust-owned policies can qualify for potential sale in addition to individually owned policies. This will trigger client prospects in their minds. You could publish an article on life settlements in a local business journal making sure your byline includes contact information. You also may want to market life settlements to those who provide other services to seniors, perhaps those who offer senior healthcare services or those who organize senior activities. Offer a compensation incentive for them to recruit prospects for you.
Finally, connect with the planned giving officer at your alma mater or local university. Universities frequently receive life insurance gifts. Most would prefer getting the cash now to waiting years to collect a benefit. A life settlement gives the university the opportunity to get immediate cash. Perhaps the university could send a letter to alumni who are approaching the age of 70 about making gifts of the proceeds of unneeded or unwanted life insurance policies. The tax deduction for donated assets is the fair market value of the asset. The deduction for the cash donation of a life settled policy would be larger than for the donated policy itself.
Selling a new financial service requires awareness, then familiarity, then expertise, then planning and creativity, commitment, and follow-through. It is not too late to add life settlements to your arsenal of product ideas. Remember, the very first Baby Boomer, who will not turn 70 until 2016, will soon be followed by millions upon millions more.