One question financial advisors are asking themselves today is whether life settlements have returned to the fold as a viable tool in their clients’ planning strategies. Clients who have seen their retirement portfolios sink in the past few years need options, and selling life insurance policies that they have identified as unattractive investments can provide the funds they need to re-enter the marketplace. For those who are having difficulty making premium payments, or who simply need cash from their policies to purchase a product that guarantees retirement income, the life settlement market may be a highly attractive option.
The liquidity challenges experienced during the recession that began in 2008 limited the life settlement market by reducing the prices that policyholders were able to realize. While the regulations have caught up with the market for stranger-oriented life insurance since 2008, the lingering effects of the recession may have created a new market for life settlement sales—the retiree who has seen his retirement portfolio depleted during an unstable economy. As a result, pricing on these transactions has recently begun to make a comeback.
A life settlement is the transaction through which an individual sells a life insurance policy insuring his life for a portion of the death benefit value. The purchase price depends on the value and type of policy offered but also varies based on the life expectancy of the insured. The policies are typically purchased by institutional investors. Upon completion of the sale, the investor is named as the policy beneficiary and continues to pay the premiums for the duration of the insured’s life.
Because the purchaser is required to maintain the policy during the insured’s lifetime, a longer life expectancy usually leads to a lower purchase price. As institutional investors aim to maximize their investment gains, policies covering an insured with a terminal illness and, therefore, a short life expectancy, often present the most attractive investments.
The practice of locating terminally ill policyholders who require cash flow at the end of their lives has given life settlements a negative reputation. Despite this, because of the recent market downturn, there are plenty of other reasons why a client may be interested in selling a policy.
The volatile economy of the past few years has created the very real situation where retirees are running out of income during retirement. These retirees may lack the funds necessary to continue paying the premiums on their policies. Instead of returning to the workplace or letting their policies lapse, many would choose to sell an existing life insurance policy and purchase an annuity product to guarantee lifetime income.
Additionally, there is perhaps a more natural reason for retirees to become interested in the life settlement markets. Many retirees purchase life insurance at a time when their circumstances call for protection against sudden death—for instance, to provide for minor children or surviving spouses. Eventually, these retirees may begin to outlive their need for life insurance protection as children become financially independent and spouses predecease them. Instead of letting these policies lapse, these seniors may prefer to sell their policies and invest the proceeds elsewhere.
Whether the market for life settlements has truly returned remains to be seen. Despite this, the option is one that many current retirees who fear running out of money during retirement would like to have available.
By ROBERT BLOINK, ESQ., LL.M., WILLIAM H. BYRNES, ESQ., AdvisorOne