Do Life Settlement Clients Need to Sell the Whole Policy?

A life insurance policy form from Philadelphia Fire and Life. Credit: Library of Congress http://hdl.loc.gov/loc.pnp/pga.13732

This question comes up often and is the result of one of the misperceptions that many advisors have about life insurance settlements.

This answer to this question is: No!

To be clear, in many circumstances, clients may want to sell their entire policies, and, in most circumstances, this works well, because the client no longer wants, no longer needs or can no longer afford the policy.

But what if your client wants some death benefits?

There are some circumstances where clients do not need to sell the entire death benefit.

Convertible term policies

Selling term policies is very common, and it sometimes surprises advisors that term life policies can be sold.

Most of the time, to be marketable, the term policy must be convertible to a permanent policy and not past the conversion deadline.

If this is the case with your client's policy, the policy can be highly marketable.

In this circumstance, your client can keep part of the policy as term, or convert part of the policy for themselves, and sell the balance.

Example 1: A recent client had a $1.25 million convertible term policy that was approaching the end of the policy, and the conversion deadline.

He sold his business, so he did not need that much coverage. He chose to convert $250,000 to keep for his family.

The other $1 million would go away at the end of the term, and he would receive nothing.

The policy was marketed, and the client received $60,000 for the policy.

This scenario was a win-win for him, as he was able to keep some coverage for his family and receive some money for something that he was going to walk away from with zero.

Example 2: Another recent client had a similar situation to the example above, but with a different motivation and outcome.

Like the client above, there was a $1.25 million convertible term policy. The client retired and decided he did not need all of the coverage. The premiums were beginning to be a drain on his budget.

The term policy had another three years left on the level term period, but the conversion deadline was approaching.

In this case, the client did not convert $250,000.

He chose to keep the $250,000 as a term policy for the remaining three years, so there was some coverage just in case, but sell the $1 million balance.

He netted $15,000 because his life expectancy was longer than the client above, and the conversion premiums were higher.

The bottom line: Look at the conversion deadlines of your clients' policies to see if they wish to keep or convert the policy.

If your client wants to keep only a part of a policy, a life settlement can be a good solution to bring your client more money than walking away with zero.

Retained Death Benefit

Through a retained death benefit, or RDB, the entire policy is sold, but the buyer retains a death benefit for the client's beneficiaries.

The advantage is that the client gets out from underneath the policy premiums, because the buyer pays the entire policy premium, and the client still has some policy benefit for beneficiaries.

Not all policies qualify, and it is up to the buyer to agree to an RDB, but, especially if a policy has a larger sale offer, this can be a good solution for clients who still want their beneficiaries to receive some benefit from the policy.

Example 1: A client had an $800,000 universal life policy with $100,000 cash in it.

He was tired of paying premiums and needed to put more money into the policy to carry the policy further into the future than it would go using just the cash in the policy.

The cash offer for the policy was $200,000 — doubling the cash.

He accepted the offer.

But he thought out it, and before signing the sale contract, he said that he really didn't need the money and would prefer to maximize the death benefit for his family.

The buyer agreed to zero cash and a $350,000 retained death benefit for his family.

The client was thrilled. He no longer needed to pay the premiums, yet his family would still benefit from the policy.

Example 2: A client owned a $400,000 universal life policy, with a colleague as the insured.

The premiums had gotten very expensive to continue the policy and were becoming a financial strain.

The policy was marketed for an all-cash offer, which the client declined.

However, the client requested an RDB offer, which the buyer provided — a declining RDB — which the client accepted.

In the end, the client received $10,000 cash, a $200,000 RDB for the first two years and a $100,000 RDB for the next three years. The RDB fell to zero after five years.

The client was delighted to get out from underneath high premiums. He believed that his colleague would not survive five years, so the colleague would receive some benefit from the policy.

The bottom line: Not all clients and policies will be eligible for an RDB, but if your client wants to retain some death benefit for beneficiaries, an RDB is an option that can provide a solution.

The life settlements market is dynamic, and it offers many ways to meet clients' needs.

Most clients prefer to sell their entire policy, but, if you have a client who wants some benefit for the beneficiaries, convertible term policies and retained death benefits can be the solution.

Lisa Rehburg is president of Rehburg Life Insurance Settlements, a life insurance settlements broker. She can be reached at 714-349-7981.