Using Life Settlements as an Inflation Hedge

Life settlements offer an opportunity for agents and advisors to help ease short-term inflation anxiety, improve long-term financial stability, cement their position with clients as trusted advisors — and earn some well-deserved, non-reportable referral fees along the way.

Inflation and associated rising costs are among the top fears for senior clients.

Individuals who are now in their 70s and 80s felt the full brunt of high inflation the last time it was significant in our economy — back in the 1970s.

Interest rates were astronomical compared to what they are today, and they remember how perilous it felt.

Fortunately, we have had 40 years of low inflation and relatively low-interest rates.

Speaking with some of our senior clients, we hear about their concerns about rising prices, and many are looking for ways to cut costs.

As a hedge against inflation risk that has the potential to chew away at retirement nest eggs (in both the short and long term), we are telling clients with whole and universal life policies that now is a great time to perform a policy appraisal as part of an overall assessment of coverage.

Premium payments may become onerous as costs are rising, particularly for those who are operating with a fixed income mentality.

Budgets are tightening and many seniors are not seeing their money go as far as it once did — and they're looking for some sort of relief.

A life settlement may provide the answer.

For example, a senior client with a $1 million universal life policy may be blowing through $6,000 to $7,000 per month to keep it in force. Given rising costs, they are likely looking at those payments and seeking some flexibility.

Here are the options.

In many instances, a senior client with a $1 million policy could expect a cash payout from a life settlement of about $250,000.

They would go from paying a hefty premium to having an additional $250,000 to invest, with you.

Options abound for both the payout and the roughly $80,000 annual premium payment that they will no longer be sent directly to the insurance company.

1. Increase assets under management.

Placing the settlement proceeds under management is an attractive option for all parties.

It enables the client to spread some risk and increase upside opportunity as many seniors are still looking at the broader stock market for growth.

Adding in the premium payments, or some portion may be the perfect addition to the overall financial plan.

It's easy for an advisor to do an illustration to explain how placing money under management may be a better option when compared to a prior need for a death benefit.

In addition, placing "future" premium payments into assets under management has other benefits for the client and the advisor.

In this scenario, the agent is making a sound recommendation that will increase their total assets under management, harden the overall financial plan, and earn a nice referral fee from the life settlement transaction.

2. Purchase an annuity or other product.

While it may not make sense for a client to acquire replacement coverage after a life settlement, an annuity might be a great fit.

A single-premium variable annuity could help them diversify and offer some guaranteed income down the road.

Yes, the interest rates are low for these products now, but the flexibility offered by eliminating the life insurance policy premium payment might be just what a client needs — in both the short and the long term.

In this scenario, not only does the agent offer a solid solution for their clients, but they also earn a "double-dip" referral fee for the life settlement transaction and a commission for the annuity product.

3. Free up cash for the family or themselves.

While our instinct as advisors is to put the payout from a life settlement to work, sometimes it might make sense for clients to gift it, place it in a trust, or spend just it.

For senior clients who are worried about their children and grandchildren, a settlement payout may be used to fund a trust or simply as a gift to relatives who are struggling.

Also, many seniors stopped traveling and seeing family during the pandemic, so they may want to make up for the lost time by traveling and enjoying their golden years a bit more than they have in the recent past.

Again, while we always want to recommend sound financial moves, we also don't want to forget why our clients have been following our advice and saving money with us for years — so they can enjoy the fruits of their labor.

A little bit more on what we call the "double-dip." Agents and advisors can put money in motion with a life settlement and then earn commissions on both the settlement and the sale of another insurance product.

After securing a policy appraisal by providing an in-force illustration and basic info, a life settlement payout can help clients cut costs while the advisor earns a commission: dip one.

Next, by adding the settlement to AUM or offering a new insurance product, the agent or advisor earns an increased commission or a substantial referral fee: dip two.

Inflation and rising costs are going to be major influencers for the remainder of the year and maybe longer.

Clients need to understand that a policy appraisal can help them understand how they can leverage their current life insurance to handle short and long-term concerns — and everyone loves a double-dip.

Wm. Scott Page (Photo: PolicyAppraisal.com) Wm. Scott Page is the founder of PolicyAppraisal.com.