Rob Haynie is the Managing Director of Life Insurance Settlements, Inc. and serves on the Board of Directors of LISA.
Having just begun my 30th year in the life settlement market, I’m beginning to see a momentum shift in both the acceptance and the awareness of the life settlement option. The most recent monumental event (at least in my world) took place in July 2023, when FINRA published their investor insights guidance entitled, “What You Should Know About Life Settlements.”
They mentioned that many older Americans were beginning to hear about an opportunity to sell an existing life insurance policy today and use that money for another purpose of their choosing.
They took the time to explain, in crystal clear fashion, what a life settlement is: “If you own a life insurance policy that you no longer want or need, or if you can no longer afford the expense of paying insurance premiums, you can surrender the policy for its cash value or allow it to lapse. Life settlements present a third option: Sell your policy (or the right to receive the death benefit) to an entity other than the insurance company that issued the policy. That transaction is known as a life settlement.”
A Look At The Data
So, what happens after that? Sellers get more money than they would otherwise receive from surrendering a policy, and they typically repurpose those funds: sometimes purchasing an annuity, helping fund their long-term care or a move into some kind of senior care facility, etc. We are talking about a substantial difference in some cases.
Now, don’t take my word for it. I’m on the board of directors for the Life Insurance Settlement Association (LISA), and we conducted two independent data collection surveys, illuminating the difference between cash surrender values versus settlement amount received by sellers in the secondary marketplace. Last year (2022), LISA discovered that seniors received precisely 5.2 times more on average than the cash surrender value offered by the insurance company. In 2021, the average was 7.8 times more.
Others have found, “People typically get four to 11 times the cash surrender value of a policy.” A 2013 study at the London Business School on more than 9,000 life insurance policies concluded it was four times greater. And data from 2009 shows the median total amount paid to a policy owner ranged from $37,780 to $992,618.
Even if a typical life settlement only added 5% more than surrender or lapse, that’s still good enough and a reason to investigate. However, LISA’s results show an average of 6.5 times more than surrender in just the last two years. I can only speak for myself but if given the choice between $10,000 and $65,000, I’m taking $65,000 every time.
Marketing And Sharing Information
I know that more and more Americans learn about life settlements through myriad marketing initiatives, most notably, the numerous television and radio ads running 24/7/365 first come to mind. Often, the consumer looks to validate that new information after hearing or viewing one of these posts and quickly heads to the internet.
When an organization like FINRA explains the process and explains the pros and cons, I’ve found that goes a very long way in helping people make an informed decision and, at the same time, giving them peace of mind.
Life settlements aren’t for everyone, but when our marketplace only buys a small portion of death benefits per year while somewhere around $200 billion of death benefit is either lapsed or surrendered by American policy holders 65 years old or older, we can only wonder how many more people would have benefited if they only had the knowledge about this option.
How Industry Leaders Can Help Spread Awareness
We need to continue to educate the financial services community, and that includes showing them how to better identify prospects. Our industry continues to evolve and discover new ways to present life settlements as a financial sales tool. We can help clients find money inside of an asset they didn’t know they could utilize while they were still alive and use that money to purchase an annuity, fund their retirement, pay for a grandchild’s college or take a long overdue vacation. The possibilities are endless.
For those in the industry, this requires nothing more than a financial planning exercise to see if clients have the right life insurance; maybe they have too much or not enough, or maybe they don’t need it at all. It should be part of every financial professional’s annual review.
Advisors in the financial services sector also need to educate themselves about all the options available to their clients as it relates to their life insurance. Is a loan the best option? Maybe it’s gifting the policy to a 501(c)3? Maybe they reduce the benefit to keep the premiums more affordable? Lastly, maybe surrendering the policy is the advice.
I recommend advisors create a “catch all” strategy to review their client’s life insurance holdings (among other assets) on a quarterly, biannual or annual basis. I know this helps identify prospects because a lot of our relationships put a review of some sort into practice as it relates to life insurance.
Remember, it doesn’t cost anything to ask, but it could cost a lot more if you don’t. Pay attention to lapse notices. In my experience, clients who receive a substantial settlement tend to deploy or repurpose those newly acquired funds through their advisor—especially, if the advisor played a significant role in procuring the financial windfall.
In conclusion, the word is getting out about the life settlement market, and our industry gets to piggyback off this momentum. As the television advertisements grow in frequency, along with the radio ads and podcasts that discuss the ABCs of life settlements, it becomes harder to keep one’s head buried in the sand. The days of professional financial advisors not performing their fiduciary duty on behalf of policy holders is coming to an end—and it can’t end soon enough.
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