Life settlements can benefit the growing senior market
By Larry Simon
Life Settlement Solutions
Life settlements are a vital planning tool for the baby boomer generation as it ages; however, many seniors are unaware of the financial planning options available to them through the life settlement market.
In the past, seniors who no longer needed their policies or needed new insurance coverage were left with few alternatives -- allow their policies to lapse or surrender policies for often nominal cash surrender values. Life settlements emerged in the early 90s and have since provided seniors with a new option for dealing with unwanted life insurance policies. Life settlements add a welcome alternative and allow for more targeted financial planning and more choices for eligible seniors. Financial professionals who are working with this demographic today have an opportunity to tap into the growing life settlement industry, thereby offering senior clients a new financial option and helping to increase and promote new business practices.
An aging population
The senior population today is growing rapidly. In fact, according to the "The State of Aging and Health in America 2007 Report," released by the Centers for Disease Control and Prevention (CDC) and The Merck Company Foundation, the number of Americans aged 65 and older will more than double by 2030, with some states seeing the amount of seniors rise to 25 percent of the overall population. This expected increase will bring the senior population to 71 million -- approximately 20 percent of the overall U.S. population.
The aging of America has already opened the door to more financial professionals who are interested in working with life settlements. Senior clients may be looking for new ways to deal with life insurance policies, or are not aware that there are efficient ways to use the money from a policy for charitable donations or a number of other financial planning goals. The continued growth of the senior market will only strengthen the life settlement industry and provide more opportunities for financial professionals to get involved in the secondary market for life insurance.
Life settlements refresher
A life settlement is defined as the sale of an existing life insurance policy in the secondary market, where an insured person relinquishes policy ownership in return for an immediate cash payment. Once sold, ownership and premium payments are taken over by a third party purchaser, who collects all death benefits associated with the policy upon the death of the insured. Such transactions benefit eligible seniors by offering significantly higher values than the cash surrender values offered by the carriers and the opportunity to use the proceeds from the sale of the policy to meet other financial planning goals.
While life settlements can benefit some seniors, they are not for everyone and should only be considered after an analysis of a client's current financial and insurance situation. Financial professionals who are considering discussing life settlements with a senior client should factor in the following guidelines to help determine eligibility:
1. Seniors must be free from any catastrophic and chronic conditions or terminal illnesses
2. The minimum age of the insured must be 65 or older (female candidates are typically 75 or older, while most male candidates are 72 or older)
3. Policies must be beyond the contestability period
4. Life expectancy must be greater than two years
5. The minimum aggregate face value of a policy is $50,000
Life settlements can be the perfect solution for eligible seniors who are looking to rid themselves of life insurance policies that no longer make sense for their current lifestyles. The transactions may be appropriate for seniors for a number of reasons, with the most common being lifestyle changes, new investment options and charitable giving.
For seniors who have experienced significant life changes or who need new coverage options, life settlements can provide a solution for dealing with unnecessary or under-performing life insurance policies. In addition to offering seniors a way out of such policies, the transactions can also provide a means to fund new insurance policy purchases. Seniors who are asset-rich may lack the cash to purchase a new, more appropriate, policy. By completing a life settlement transaction, these seniors may be able to use the proceeds to purchase new policies that better meet their needs and potentially reduce their policy premiums. Money earned from a life settlement can also be used to make other financial purchases, including real estate and annuities, or to make charitable donations.
Finally, the following situations cover examples for when a life settlement transaction may be beneficial to a senior client:
- Rising premiums have become cost prohibitive
- Funds are required to meet other needs, such as long term care
- Estate tax liability has changed
- There is a need for more appropriate life insurance coverage
- Beneficiary status has changed because of divorce or death
- A term policy is near the end of its term period
- Unexpected financial distress has occurred
- The client has acquired enough wealth to be self-insured
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