An Opportunity Knocks: Opening the Door for A Life Insurance Settlement Option
James Dawson, CFP®, CLU®
Director, Life Settlements, Valmark Financial Group
in collaboration with
Terry R. O’Neill
Founder, Institute for the Study of Global Economics and Finance (ISGEF)
(Democratizing information and advancing the frontiers of economic thought…)
We are seeing, in today’s world, that the life insurance policy is a wonderful piece of property as an asset class—far more viable than we ever would have thought in the past. In this third installment on retirement and estate planning, we present the option of Life Settlements.
What if there were, in addition to the options of surrendering a life insurance policy, or letting it lapse, a third option that could be far greater for the consumer who no longer wanted or couldn’t afford their policy?
Perhaps your life insurance premiums have jumped to a point that is beyond your means. Most people are not seeking out the door of a life settlement, but for many people 65 and older, it can be a great option to consider.
Life Settlements are not that different than the real estate market today. Consider, for a moment, the surrender value of your policy. Imagine you built a house in the 1960s for $100,000 and you no longer wanted the house. Would you sell it back to the original builder for $100,000, giving it back for much less than its current worth? Why not sell it on the open market for $1 million? Life settlements produce (on average) 7 to 8 times the cash surrender value.
Life Settlements began in the 1980s with the arrival of the AIDS pandemic so that individuals with life expectancies of 2 years or less could possibly receive some enhanced enjoyment during the balance of their lives. Government ruled that life insurance was a personal property asset which could be sold. At the time, they were termed “viatical settlements”— an investor could purchase a policy from an individual with a short life expectancy; that individual could then benefit from receiving a significant portion of the value of the life insurance policy before passing. The investor would then take on the additional premiums, and receive the death benefit.
Fast-forward to today and there is a much wider audience that may qualify for a life settlement. In some cases, insureds with 25-year life expectancies or longer may be able to sell their policy for more than the surrender value. The market opportunity has grown in multitudes, yet there is a large gap in consumer awareness.
Why don’t we hear about this option more often?
Most insurance policies are not being actively managed. A financial professional is not required to review a policy every year, for example. It comes down to proactive awareness on behalf of the consumer, or their professional life insurance representative, attorney or CPA. Recent market studies have suggested that nearly 80% of consumers are not aware that a life settlement is an option to consider, and more then 50% of professional advisors admit they lack knowledge about life settlements.
Larger insurance companies have not historically been proactive regarding life settlement awareness. The insurance company benefits when a policyowner surrenders or lapses their policy. It is estimated over 112 billion dollars of death benefit is being lapsed or surrendered by insured’s age 65 or older each year. This statistic is expected to continue to grow as the baby boomer generation begins to enter the senior citizen demographic.
If I sell my policy, will I be safe?
A common misconception is that there is an individual investor who “knows the price on your head” and you suddenly feel you need to sleep with one eye open. It is important to know this is an institutionalized process. When a policyowner sells their policy, it typically becomes part of a large portfolio with hundreds, or thousands of policies held within an alternative investment fund. Buyers today are institutional investors, such as private equity, pension funds, and hedge funds.
The insured’s privacy and safety are further safeguarded with the appointment of a servicing company that is paid a flat annual fee to maintain the policies after being sold. These servicing companies have no incentive on an insured passing away, and create an appropriate buffer of separation. With multiple layers of separation between the investor and insured, combined with significant legal regulations today, insured’s can be confident that selling their policy is a safe process.
What is the process like?
The life settlement process can again be compared similarly to selling your home today. Selling your home typically consists of a couple months to prepare your home for listing, a couple months to list the home on the market and find a buyer, and another month or two to close on the property.
Similarly, selling your policy is a 3-6-month process (sometimes longer). The process starts with signing a HIPAA authorization and providing a list of all your doctors. The financial professional will work towards collecting necessary information for buyers to make the determination on how much they can offer to purchase the policy. One important note is that, unlike when getting new insurance, the life settlement process does not require any in-person underwriting tests to be done. Once an offer amount is determined, you can decide if the offer is substantial enough to sell. If you decide to sell, closing contracts are signed. Once signed and in good order, the ownership changes to the investor, and you receive an agreed upon cash amount.
How are people selling today? A battle between two options
Today, the market consists of two primary ways to sell your policy. A policy owner can apply with a single provider to act as the purchaser of the policy. A provider either uses proprietary funds or represents institutional investors who buy policies. The provider will make a single offer to purchase the policy. The benefits of selling directly with a provider can be potentially faster transaction times, as well as little or no direct fees involved by selling. The primary downside applying direct is only getting one offer and not knowing if the offer is fair or reasonable. Many direct providers are advertising themselves on television or radio today to bring awareness to the consumer.
The second option is to hire a life settlement broker with financial professionals who will work on your behalf to work with multiple providers. The benefits of working with a financial professional representing you through a life settlement broker is their unique ability and experience to work with a large network of providers and have them compete against each other until a high offer is achieved. The downside can be longer transaction times, and fees for the broker and financial professional’s services.
Valmark Financial Group, an independent broker/dealer takes policy owners through a unique life settlement process. This process involves Valmark working with the majority of the industry’s largest providers who represent hundreds of institutional investors, auctioning your policy until a high value is determined. Valmark would then help guide you on the offer and help determine if it is in your best interest to sell it.
Valmark notes that from their 20+ years of experience in the industry, the value of the policy is very much in the eye of the beholder and finding the buyer who is willing to pay most is crucial for the consumer to receive maximum value for their policy. A consumer may have 2 or 3 direct providers they could apply to sell their policy with but will never have the ability to apply to the entire marketplace of providers without appointing an experienced financial professional.
I’d like to consider my options, where should I start?
Your life insurance policies need to be managed. Good policy management will allow you to be aware of your options and will keep your policy on track through your lifetime.
Questions to ask:
1. When was the last time I had my policy reviewed or audited?
Many consumers purchase a policy then forget about it for years. Life insurance has taken on many forms from whole life to universal life. A lot of life insurance policy designs today are not guaranteed, and are underperforming. Reviewing the performance of your policy and exploring alternative options is recommended every couple years.
If you are not aware of how your policy is performing, speak to a financial professional to ensure the policy is performing as intended. Valmark’s Policy Management Company™ offers both one-time reviews, and ongoing annual reviews of life insurance policies for a nominal fee.
2) After you receive a review, ask yourself this question: Can I afford the adjustable premiums? Do I still need this policy? Are there better alternative options for me today?
You may have taken out life insurance with the assumption there would be a lifetime insurance need, but over time the need seems secondary to other financial priorities. With a life insurance policy, you can potentially exchange it into an income producing product, long term care insurance, or even receive cash proceeds from a life settlement.
Closing Thoughts
Life insurance is a valuable asset, and for most policyowners it makes sense to keep the policy as an ideal asset to transfer to beneficiaries. However, it’s understandable for policy owners today to want options, especially for policies that require substantially higher premiums than originally expected. Today, a life settlement creates an additional option for policy owners that is being overlooked by many professionals. Start with a policy review to see how your policy is performing and ask your financial professional what other options may unlock the value in your life insurance policy.
Additional Information:
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Disclosure:
In a life settlement arrangement, the current policy owner transfers the ownership and beneficiary designation to a third party, who will receive the death proceeds upon the death of the insured. As a result, this buyer has a financial interest in the seller’s death. When an individual decides to sell their policy, he or she must provide complete access to his or her medical history, and other personal information, that may affect his or her life expectancy. This information is requested during the initial application for a life settlement. After the completion of the sale there may be an ongoing obligation to disclose similar and additional information later. A life settlement may affect the seller’s eligibility for certain public assistance programs, such as Medicaid, and there may be tax consequences. Individuals should discuss the taxation of the proceeds received with their tax advisor. Individuals considering life settlements should carefully read the entire sales agreement, consult their advisors, and consider all available options before selling their policies. Valmark Securities and its registered representatives act as brokers in the life settlement transaction and receive compensation from the purchaser. A life settlement transaction may require an extended period to complete. Due to the complexity of the transaction, fees and costs incurred with the life settlement transaction may be substantially higher than other securities. Neither Valmark Securities nor its registered representatives provide tax advice.
Securities offered through Valmark Securities Inc., Member FINRA, SIPC.
James L. Dawson, CFP®, CLU® is the Director of Life Settlements at Valmark Financial Group. He is responsible for managing the day-to-day operations of the life settlement business. James works closely with policyowners and financial professionals in helping navigate the life settlement process – from providing initial estimated offers, marketing and auctioning the policy to potential buyers, to executing the closing and delivering a cash settlement to the client. Above all, James is passionate about delivering the best possible client experience and ensuring that there is clear communication.
James earned his BBA in financial planning from the University of Akron, graduating Summa Cum Laude. He also holds his Ohio Life, Health, Accident and Variable licenses, Series 7, 24, and 66 registrations, and is a Certified Financial Planner (CFP®) and Chartered Life Underwriter (CLU®).
Terry R. O’Neill
Disciple, Husband, Father, Grandfather, Mentor, Friend, Industry Leader…
Encouraging the Lives of Others to Enjoy an Eternal Significance
Terry R. O’Neill founded his financial services enterprise in 1978, over four decades ago, specializing in the engineering of corporate employee benefit planning, executive benefit planning, and business succession planning for organizations. The enterprise designed comprehensive financial and wealth creation strategies, developed estate and retirement planning concepts along with multi-generational estate and wealth conservation strategies for families and individuals. He monetized the firm in 2017.
Over those four decades, Mr. O’Neill served on four major financial association boards: 3 domestic and 1 international. In addition, he was nominated to be an advisor to the Federal Open Market Committee, was an advisor to the Small Business Council of America, was an Associate Member of the Milken Institute and formerly a Member of Roubini Global Economics. Mr. O’Neill has advised two California Governors on economic and business issues. He has served on committees that have advised the U. S. Treasury and Congress on numerous financial topics.
He authored The Life Insurance Kit (1993: Dearborn Financial Publishing, Inc.), and has written for numerous publications in the financial industry including Financial Services Week, Employee Benefit Plan Review and The National Underwriter. Mr. O’Neill has appeared frequently as a guest on television and radio to discuss the economic ramifications of issues in healthcare, employee benefits and retirement planning and was profiled in Leadership Magazine and the Orange County Register. He has spoken regularly on economic and financial topics at national conferences.
Since 2017, Mr. O’Neill has been working on special economic and financial consulting projects in an independent fiduciary capacity. The majority of his time is devoted to the Institute for the Study of Global Economics and Finance which he founded in 2015. The Institute focuses on the democratization of global economic information and advancing the frontiers of economic thought.
In 2023 and beyond, Mr. O’Neill will be focused exclusively on mentoring and consultative guidance for individuals and business owners, defining and refining their short-, medium-, and long-range financial goals and objectives.
For further reference, please read these previous Economic Outlooks for Technolink from Terry O’Neill:
21st Century State-of-the-Art Dynastic Estate Planning with an Emphasis on Multiple Generations, co-authored with Steve Driscoll, Esq., and Zach W. Hurst 9/10/22
Democratizing Retirement Income Planning Through the Lens of Economics and Finance: The De-Accumulation and Stewardship of Assets, co-authored with Zach W. Hurst, 5/3/22
Black Swan versus Gray Rhino…A Possible Coming Event, 11/18/21
A Macro-Economic Outlook: Creating A Global Perspective, 6/1/21