Q1 - Vol. 3, No. 2, February 2006
Life Settlement News
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Women Over 70 Are
Discovering the Problem-Solving Capability of Life Settlements
Version of this article
was
published in National Underwriter, Feb. 20, 2006
Authored by Sean McNealy,
co-president of Advanced Settlements, and Marlene Frith, Marketing
Director
Changes in family dynamics, such as the death of a
spouse or a divorce, can present a new set of challenges for senior
women – especially as it relates to decisions regarding in-force life
insurance policies owned by either spouse.
In sensitive and emotionally charged situations such as death and
divorce, insurance agents and professional advisors are often called
upon for their expertise to help the widow or divorcee work through the
set of options available. It is important at times such as these, that
the professional advisor fully evaluate the client’s complete financial
picture, and make prudent recommendations to meet the client’s needs as
it relates to the disposition of existing life insurance policies.
Those decisions may involve three alternatives – surrender, settlement,
or retention.
Although life insurance is a necessary tool in the creation and
protection of income and wealth, circumstances change over the years. In
many cases, life insurance policies transcend the need for which they
were originally purchased, and for some insureds, the premium payments
have become burdensome. With the emergence of the secondary market for
life insurance policies, seniors over the age of 70 have an option for
policies that may be in danger of lapse or being surrendered. According
to a study released by Conning Research & Consulting in January 2006
entitled: Life Settlements – The Concept Catches On, “life settlements
provide a secondary market for unneeded or unwanted life policies, and a
positive financial benefit to many of the insured that take advantage of
them.”
Consider for example the case of Jane Smith (not her real name) who was
left making decisions for their estate when her 88-year-old husband
passed away. Over the years, her husband had invested heavily in real
estate, and at the time of his death, payments were coming due for
transactions that he had financed. Because Jane and her financial
advisor did not believe the timing was right to sell the real estate,
they evaluated her portfolio to identify potential sources of capital to
satisfy the debt. They discovered that Jane owned a $1 million
universal life insurance policy that she no longer wanted or needed.
The policy had zero cash surrender value, and the premium payments were
$56,000 annually. Jane and her agent pursued a life settlement and
received $220,000 – nearly 25 percent of the policy face value. The
proceeds were used to pay off the debt from her husband’s real estate
investments. Problem solved.
In the case of Mary Johnson (not her real name), she and her husband,
age 78, decided to divorce and were forced to make a decision regarding
the disposition of a $1 million life insurance policy. The annual
premiums were $25,550, and the policy had a cash surrender value of only
$8,179. When their insurance agent suggested they explore a life
settlement, the couple agreed and received $120,000 – an amount 15 times
greater than the cash surrender value. The couple decided to split the
proceeds from the settlement as part of the divorce agreement.
In an industry that Conning Research estimates grew from $2 billion in
2002 to $5.5 billion in 2005, our research indicates that life
settlements on policies for women over the age of 70 comprise
approximately 30 percent of the transaction volume. As illustrated in
the two case examples above, the problem-solving capacity for life
settlements can run the gamut in terms of its creative applications. In
1911, the U. S. Supreme Court ruled in Grigsby v. Russell, that life
insurance policies could be sold. As more senior women and their
professional advisors begin viewing a life insurance policy as an asset
that can be sold or leveraged to address a whole-host of financial
objectives, we expect to see an increase in the creative uses for life
settlement transactions initiated by women.
Another creative application for life settlements that both men and
women over 70 are discovering is the opportunity to sell an existing
policy on the secondary market and apply the proceeds toward replacement
coverage. With today’s relaxed underwriting, some seniors are
leveraging their existing insurance asset by using the proceeds from a
life settlement to achieve lower premium payments and better
guarantees. If our own experience is an indication of the entire
marketplace, approximately 40 percent of our life settlement
transactions in 2005 involved some form of replacement coverage.
Although the recent Conning Research study states “There does not appear
to be any question that life settlements are here to stay,” many
insurance agents and professional advisors are either unaware of the
option, or do not know enough to discuss the topic with their clients.
At least one recent survey has indicated that less than 15 percent of
insurance agents have done a life settlement. The primary reason cited
is the lack of understanding and the need for more education.
Summary
Unlike the days when men were the sole “bread-winners” and women were
the sole “bread-bakers,” today’s women of all ages are taking a more
proactive role in decisions relating to insurance and their financial
security. Whether placed in the decision-making role out of necessity,
or through their own initiative and empowerment, senior women who are
faced with identifying a solution to a challenging financial objective
should discuss the creative applications of life settlements with their
agent or professional advisor. For agents and advisors who believe they
need to boost their knowledge base on the topic, the Internet is an
excellent source of information when using the keywords “life
settlements.” Furthermore, life settlement brokers with longevity in
the marketplace and a fully-staffed compliance department often provide
white papers and other educational materials to assist agents in
developing their knowledge about life settlements.
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