Why lifetime settlements are becoming a popular financial option

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Americans are living longer than ever. That’s great news for those who can afford it, but bad news if you’re a baby boomer with growing debt and dwindling savings.

The Stanford Center for Longevity reports that baby boomers hold less wealth, are more in debt, and will face larger expenses than retirees a decade older than them. And given that there are more than 71.5 million baby boomers living in the United States, the number of people who might run out of money in old age is staggering. So what options do baby boomers have?

An option unknown to many

During my 22 years in the insurance industry, I have found that most people are unaware of an option available to life insurance policy owners. People with life insurance can sell their policy to recover equity and fund their golden years. A life settlement, as it’s called, can help cover medical bills, long-term care, or any financial expenses of the policy owner. But unfortunately, most policies expire or are transferred without the owner benefiting from it.

According to a 2018 study by investment management firm Conning, $ 200 billion of life insurance will lapse or be surrendered each year until 2027, which could be eligible for a life insurance settlement and be pocketed by the policy owner. And, according to a London Business School study, a lifetime settlement pays policyowners on average more than four times the cash value of the policy.

Consider also the following statistic: 88% of all universal life insurance policies issued are lapsed or surrendered – with no death benefit paid – because policyholders no longer want or need their policies, or that they can no longer afford them. This is where living establishments can play a central role.

Why are lifetime settlements becoming a popular financial option?

In addition to the above details, the following explains why lifetime settlements are becoming a common financial option for retirees:

• The impact of the pandemic on jobs and retirement accounts: The recent COVID-19 pandemic has hit retirement accounts hard and caused the loss of jobs by millions of people. Many of these workers are seniors who have had to continue working because of the retirement gap of the elderly. Living regulations can be a source of urgently needed funds.

• The new higher estate tax exemption: In 2017, the estate tax exemption increased to $ 5.5 million. In 2018, it climbed to $ 11.18 million for singles and $ 22.4 million for married couples. This means that policy owners who purchased life insurance to pay inheritance tax may no longer need the policies because they no longer have inheritance tax issues.

• Increase in COI by carriers: with interest rates remaining at historically low levels, carriers are not able to make money as they previously did from their investments. To compensate for this, many carriers have increased their insurance costs (COI) for customers. One option for policy owners to avoid the increase in COI fees in their premiums is to sell their policies.

• Comfortable regulatory environment: 43 states and Puerto Rico have life regulations laws that offer substantial protections to consumers when selling a life insurance policy. Nine states require carriers to disclose that there are alternatives to lapsing or surrendering a life insurance policy when a policy is threatened with lapse, which includes the life settlement option. Additionally, in 2019, the National Conference of Insurance Legislators reaffirmed its commitment to ensuring that policyholders are made aware of the life settlement option. Even the National Association of Insurance Commissioners, the watchdog of the life insurance industry, has endorsed life insurance regulations as a way for seniors to fund their long-term care costs and other expenses.

• Baby boomers with large amounts of life insurance: About 60% of Americans were covered by some type of life insurance in 2018. The total value of life insurance coverage in the United States was of approximately $ 19.6 trillion at the end of 2018.

What to consider when pursuing a lifetime settlement

The most important thing to consider in determining if selling your policy is right for you is whether you need the coverage. If someone needs their life insurance coverage and can afford it, they shouldn’t be selling it. Lifetime settlements are for people who no longer want or need their coverage, or who simply cannot afford it.

Another important thing that sellers should be aware of is that when looking for a life settlement company, there are brokers and there are buyers. It can be difficult to tell the difference. Often times you will have to ask the company who they are. A buyer is self-explanatory, while a broker is a business that will find you an offer for a fee.

You should also research the track record of any company you plan to work with. A lifetime settlement is a lifetime transaction, so be sure to check the legal and regulatory background of this business. Are they members of the Better Business Bureau with an A + rating?

An important consideration when taking the buyer’s route is whether it is an institutional buyer. Are they using institutional money from a large life settlement fund with hundreds of other policies in the portfolio? You don’t want a private investor to have a policy on you or your loved ones.

It is heartbreaking to say the least that many baby boomers and seniors are struggling financially without knowing that such an option is available to them. Lifetime settlements are a safe option for retirees who need cash.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.

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