Seniors who purchased long-term care insurance to protect their retirement funds experienced steep hikes in their premiums over the past few years. Average increases are 50-60%. Since long-term care insurance premiums usually come out of a household’s monthly budget, this significant rate increase puts seniors in an unfortunate position.
Long-term care insurance companies failed to anticipate the cost of caring for insured people with chronic diseases. They underestimated the number of claims and overestimated the number of people who would not use the coverage at all. Cost of care is on the rise, and seniors must create a plan to pay for it with their available assets. Social security, pensions, and savings cover much of the cost, and long-term care insurance covers the rest.
People who can’t afford the rapidly rising cost of long-term care insurance must decide whether to dip into their other financial assets to cover the costs, cut their coverage amount to mitigate the rate hike or let the policy lapse completely.
A financial planner helps put the pieces of the puzzle together. With the recent spike in long-term care insurance premiums, they are under more pressure than ever to make the most of their clients’ assets. During this process, financial advisors may overlook a life insurance policy as a valuable financial asset. The sale of an unneeded policy nets an average of 20% of its face value. Even on a small policy, this amount of cash could help a senior facing long-term care insurance rate hikes keep their coverage.
Whole or universal life insurance policies that are in force are a saleable financial asset and should be treated like any other financial asset in a client’s portfolio. Investors consider the secondary market for life insurance valuable when diversifying a portfolio.
Many life insurance professionals are unaware of the potential advantages of participating in a life settlement. The life settlement industry has a history that reaches back to the 1800s, yet financial professionals remain unaware that their clients’ life insurance policies have such great potential as a cash-generating product. While many retirement planning professionals and financial advisors focus on solving and avoiding their clients’ money problems with traditional investment products, life settlements remain on the back burner.
Many seniors remain unaware that they could sell their unwanted or unneeded life insurance policy for a cash lump sum payment. The rising costs associated with long-term care and healthcare cause a great deal of stress for consumers facing retirement or declining health.
In most cases, when faced with a difficult decision about whether to continue to make life insurance premium payments, seniors believe they have only two options:
- Let their life insurance policy lapse due to non-payment, forfeiting their beneficiary’s right to a future death benefit
- Surrender the policy to the insurance company in exchange for a lump sum payment equal to the actual cash value built up in the policy minus surrender fees
Even if they can afford to continue making premium payments, many seniors realize that they no longer need the same amount of life insurance. Their beneficiary may have died, or they may no longer need to consider the future financial needs of dependents. Selling a policy through the life settlement process offers a larger payout than surrendering the policy for its cash value.
Two major consumer advocate organizations come together to educate financial advisors and insurance professionals about life settlements
The National Association of Insurance Commissioners (NAIC), working together with Life Insurance Settlement Association (LISA), recently approved a document outlining options within the private market to finance long-term care (LTC) for seniors.
LISA is an organization that works to make the life settlement industry safe for people who want to sell their life insurance policy for cash. They suggest legislation, provide consumers with education about alternatives to surrender or lapse of life insurance policies, and encourage professionals involved in every aspect of the life settlement industry to abide by Standards of Professional Conduct and a Code of Ethics.
The NAIC exists to protect the interests of consumers in the insurance industry. They promote competitive markets, work to improve regulations and create national standards within the industry. They created an “advertising code” adopted by most states to protect consumers from misleading or predatory messages.
The document produced by LISA and NAIC shows that by participating in a life settlement, seniors can access funds and ease the burden of paying for the rising costs of long-term health care insurance.
According to LISA, nearly 90% of seniors who surrendered their life insurance policy or allowed it to lapse would have contemplated a life settlement as an alternative. A life insurance disclosure requirement, adopted by six states so far, requires life insurance companies to inform their policyholders about life settlement options.
Americans over the age of 65 forfeit more than $112 billion in benefits every year when they surrender their life insurance policies or allow them to lapse. Financial advisors who understand the life settlement process can present this option to their clients as a way to finance long-term care.
Seniors who own a permanent or universal life insurance policy can surrender it to the life insurance company in exchange for its cash value. This is typically 10% of the face value of the policy. The average life settlement on the same type of policy is 20% of the face value. Even after broker’s fees and taxes, life settlements pay policyholders more than cashing out.
Major changes in life circumstances, like a divorce, the death of a spouse, the sale of a business, or medical diagnosis often cause an insured person to seek the advice of their financial planner.
There are many reasons a financial advisor may recommend a life settlement. If a policy is no longer needed or wanted, a life settlement is preferable to taking the cash value of the policy.
Securing a better future for clients is a financial advisor’s top priority. Understanding the life settlement industry and presenting this option to seniors living in or approaching retirement increases their ability to make good decisions about their financial assets.