Life insurance is often an overlooked asset, representing the largest unmanaged financial resource that many clients possess. Countless individuals continue to pay premiums on policies long after the original need for coverage has been diminished or has even disappeared. This scenario often leaves clients feeling uncertain about the value of their policies, especially after traditional evaluations or discussions about non-forfeiture options like surrendering the policy or reducing coverage have been made. However, by increasing awareness of the life settlement market alternative, clients can discover new financial avenues (and their advisory team members can reduce liability risks for themselves).
Simply asking clients the straightforward question, "When was your life insurance policy last appraised?" can ignite essential planning conversations that often reveal opportunities for greater financial flexibility. Under a number of circumstances, Cedar Point Financial Services LLC can help unlock the hidden liquidity of a life insurance policy.
Understanding Life Settlements
A life settlement involves selling an existing life insurance policy for an amount that exceeds its cash surrender value but falls short of the death benefit. The secondary (life settlement) market for life insurance policies provides clients with the chance to optimize the value of coverage that is no longer needed, wanted, or affordable. By appraising and monetizing their policies on the secondary market, clients often fetch significantly more value than their cash surrender values. This process not only creates cash flow for immediate needs but also enables clients to reallocate premium payments toward other financial priorities, such as funding education for children or for their own retirement and/or long-term care needs.
Many policyholders, including term policyholders, have invested in life insurance for decades and understandably seek more than just the intrinsic value when considering the sale of their policies. Engaging in a policy auction introduces them to a competitive marketplace where multiple institutional buyers bid for their policies, often resulting in a sale price that exceeds the typical options available to them.
Valuing Life Insurance as an Asset
Life insurance should be regarded as an asset, similar to real estate, art, or any investment. By treating life insurance as a financial instrument, clients can utilize it to generate cash flow for other planning needs. Recognizing the three potential exit options of a life insurance policy—the death benefit, cash surrender value, and fair market value (FMV)—is critical in this valuation process. Policyholders can assess their life insurance policies for FMV in the life settlement market, enabling them to unlock value that would otherwise go untapped and unrealized.
A pivotal moment in the recognition of life insurance as a tradable asset occurred many years ago with the 1911 United States Supreme Court case Grigsby v. Russell. This landmark decision established the idea of life insurance possessing the attributes of property, allowing policyholders the right to sell their policies. However, the full potential of life settlements wasn't realized until recent advancements in the secondary market.
The Life Settlement Process
Engaging in a life settlement allows the team at Cedar Point Financial Services LLC and their clients to appropriately value and monetize life insurance policies to address immediate financial needs or long-term planning goals. Life settlements are especially relevant when clients have expiring term insurance policies or who are otherwise considering ceasing premium payments, experiencing declining cash values, or no longer require or want the life insurance coverage for its original intent. This option is also beneficial for underperforming policies held in irrevocable life insurance trusts (ILITs) or for unwinding complex arrangements like premium financing.
In the past two decades, regulatory frameworks have strengthened the life settlement market, allowing transactions in all states. Oversight of insurance by state insurance departments ensures that all market participants are licensed and that transactions are conducted transparently.
The Auction Advantage
Central to the life settlement process is the policy auction, where multiple buyers compete to purchase the insurance policy. This competitive environment typically yields a higher sales price for the policy owner—maximizing value. Life settlement brokers like Cedar Point Financial Services LLC play a critical role in this process; they are tasked with representing the policy owner and negotiating on their behalf to maximize the FMV of the policy.
For example, consider a scenario where a 75-year-old client with a guaranteed universal life insurance policy, and with a $3 million death benefit, initially received an offer of $180,000 from a single buyer that advertised directly to policyholders on television. By utilizing a life settlement broker, the client was able to participate in an auction that attracted 30 bidders, ultimately selling the policy for $270,000. This $90,000 increase demonstrates the tangible benefits of competition in the life settlement market.
Recognizing Policy Owners' Needs
It is essential for clients to understand the potential value of their policies before taking any action. This is particularly important during financial transitions, such as business sales, retirement planning, or financing long-term care needs. Discussing the possibility of monetizing an illiquid asset like life insurance can open up critical financial discussions that may lead to favorable outcomes--even found money.
Situations involving business-owned life insurance offer common scenarios where policies fail to fulfill their intended purpose. A study from the Wharton School indicates that almost 85% of term policies fail to pay a death claim and nearly 88% of universal life policies ultimately don’t result a death benefit claim. Many policyholders simply surrender their policies without considering life settlement options, often missing out on valuable incremental financial resources. For instance, a retiring business owner may be on the verge of allowing a $3 million term policy to lapse due to perceived lack of value and ignorance of alternative life settlement options. After appraising the policy and exploring life settlement auction options, the advisor may find the policy has significant worth, thus providing a substantial financial windfall to the client.
Contact Cedar Point Financial Services LLC to find out if your life insurance policy, - even term insurance - has untapped value
Assessing Potential Clients for Life Settlements
Life settlements are particularly relevant for clients approaching retirement age. At the same time, it is advisable to introduce the life settlement option to all policy owners, as the potential for increased liquidity can fortify various financial planning needs and strategies. When discussing a potential life settlement sale, all stakeholders are included: the owner, the insured, and beneficiaries must provide consent. This ensures a comprehensive understanding of the implications of the sale.
While many policy buyers on the life settlement market prefer to purchase policies on insured individuals over age 70, there is still a market for policies on younger insureds, particularly those with health issues. Buyers will evaluate medical records to determine life expectancy, noting that, unlike underwriting for new insurance, the life settlement process does not require invasive medical examinations.
We are Here to Help
The evolving life settlement market presents significant opportunities for clients looking to monetize their life insurance policies. By recognizing life insurance as a valuable asset and understanding the advantages of policy auctions, clients can unlock additional cash flow to meet their immediate and long-term financial needs. The planning specialists at Cedar Point Financial Services LLC can help clients explore this solution as part of their comprehensive financial strategy.
In today’s market, ensuring clients have appropriate representation during the policy auction process is crucial. By fostering competition among multiple buyers, clients can secure the best possible sales price for their life insurance policies, creating liquidity that can significantly enhance their financial planning efforts. At Cedar Point Financial Services LLC, we work with clients’ legal, accounting, and other advisory professionals in developing and implementing strategies that optimize their individual and business financial plans.