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NAIFA's Limited & Extended Care Planning Center

The LECP Center empowers professionals to network with solution and service providers to share best practices, directly access subject matter experts, research, training and resources; and provide thought leadership so we may continue to address the changing needs of the market.

Originally published in Newsmax Finance on June 17, 2019

By Chris Orestis

The irony of aging is worrying that you won’t die soon enough. Think about it, when people are young their biggest fear is they will die too soon.

Most people prepare themselves for this possibility by purchasing life insurance to financially protect their family, and sometime their business interests as well. But today, seniors are in real danger of outliving their savings by as much as a decade. In a recent study released by the World Economic Forum, 65-year-olds today in the United States have only enough savings to last 9.7 years as retirement income.

But there is one asset that over 150 million adult Americans own that could potentially be a lifeline as they cross the threshold of outliving their money—life insurance policies. But doesn’t life insurance only pay out a death benefit to loved ones after the policy owner passes away? Well, the answer is both yes and no. Certainly a life insurance policy will pay out a tax-free sum upon the death of the insured, but a policy also has Life Settlement market value that can be paid to the owner while they are still alive.

Life insurance policies are one of the most valuable assets a person can own. They are also one of the most misunderstood and wasted. People don’t realize that a life insurance policy is personal property just like their home, and that it has Life Settlement value while they are alive, and too often abandon the policy as seniors—unfortunately after making premium payments for years! Would you abandon your home without selling it after years of making mortgage payments? Of course not, and no one should abandon a life insurance policy after years of making premium payments either.

The owner of a life insurance policy can sell their policy through a Life Settlement for its highest market value. But the problem is that not enough policy owners are aware of this unique financial option designed specifically to benefit them while they are still alive. Annual insurance industry numbers show that as many as 9 out of 10 life insurance policies are in danger of being lapsed or surrendered by the owners. In 2017, $684 Billion of life insurance was abandoned before they could pay out a death benefit. On an annual basis, over $200 Billion of that is owned by seniors who could potentially sell their policy for a significant lump-sum Life Settlement.

But awareness about this financial option is growing. TV commercials similar to a reverse mortgage are running constantly on cable TV, and more financial and legal advisors are educating their clients about Life Settlements. In fact there was $3.8 Billion of Life Settlements in 2018, and the market is on pace to be even bigger in 2019.

  1. What is a Life Settlement: It is the legal right of every life insurance policy owner to be able to sell their policy, like any other asset, to a new owner who will take over the premium payments and then collect the death benefit years later.
  2. Who qualifies: Most often, a Life Settlement is for seniors over the age of 65 with a life insurance policy above $100,000 of face value. The value of a Life Settlement is based on “reverse underwriting’ so the older and sicker a person is, the more they will get from a life Settlement. Someone too young and healthy will not qualify for a Life Settlement.
  3. How does it work: The process of a Life Settlement takes about 60-90 days, and thousands of transactions are completed every year. Policy owners tend to receive between 10%-50% of the face value by transferring the ownership of their policy through the insurance company to the new owner.
  4. What are the options: Life Settlements provide a number of different financial options to address the unique financial challenges of aging. Life Settlements can be used to maintain a reduced death benefit policy with no more premium payments, or it can be used to fund an annuity to secure an ongoing income stream for life, or it can be used to fund long-term care on a tax-free basis, or it can be used to obtain a lump-sum cash settlement.
  5. What are the tax implications: Life Settlements can provide unique tax-advantages. If the policy owner is diagnosed with chronic health conditions (2 ADL’s or more) or is medically certified as terminal, the proceeds from a Life Settlement are tax-free. If the policy owner is not chronic or terminal, then the proceeds from the Life Settlement are taxed as capital gain for the amount received above the “basis” the policy owner has in their policy. Basis is measured by the amount of premiums paid over the life of the policy-- so if a person had paid $90,000 in premiums over the years and then received $100,000 from a Life Settlement, they would have $10,000 of capital gain.

As seniors confront the realities of aging and the impact that retirement and health care will have on their finances; it is creative financial opportunities like Life Settlements that can make the difference between possibly running out of money with years left to live, or living those years with comfort and security.

Chris Orestis, executive vice president of GWG Life, has more than 20 years of experience in the insurance and long-term care industries and is nationally recognized as a healthcare expert and senior care advocate.