It is estimated that over 100 billion dollars in life insurance benefits are surrendered each year by older aged citizens in the US. (1) Unfortunately, the typical senior probably does not understand the life settlement market and the opportunity to maximize the value of an asset that many let lapse valueless after a lifetime of premium payments.
Today’s TOLI trustee needs to be aware. With the changes in the estate tax laws and the aging of the TOLI population, the opportunity to obtain maximum value for a TOLI policy may hinge on a TOLI trustee’s understanding of the life settlement market and the reasons and methods for selling a policy.
The life settlement market grew out of the viatical market of the 1980s when people living with AIDS could sell their policies tax-free to live out their shortened lives in dignity. After the advance of drugs and treatments significantly increased the lifespan of those with AIDs, the market shifted to older individuals – typically above age 65 and the terms life or senior settlements were coined.
While life settlement sales peaked in 2007-8 right before the economic crunch, the industry has bounced back and has exhibited slow but steady growth over the last few years.
Investors like to purchase life insurance policies as an alternative to a traditional investment like stocks and bonds because they are not correlated to those asset classes, providing diversification to an investment portfolio.
Policies are sold for several reasons. For some, needs change. In the TOLI market, the changes in the estate tax laws we have seen in the last year have altered the need for a policy to pay estate taxes. Changes in family or financial circumstances may also have lowered the death benefit need. Cost of insurance increases that have occurred, especially in current assumption life policies, have made some policies cost prohibitive for some grantors.
For the TOLI trustee charged with maximizing the value of a policy, the question – if and when – to sell a policy is essential. Here are a couple of suggestions:
- Before selling a policy make sure that you have completed an exhaustive review of all your other options. If you are a client of ITM TwentyFirst’s Managed Solution, this will be done for you. You must review all funding options for the policy – starting with the beneficiaries. A study on the life settlement market by Deloitte pointed out, “the return on the Beneficiary’s investments to preserve the life insurance contract is likely to exceed any other investment option.” If an investor is willing to buy your TOLI policy, they are betting it is a good investment – should you as trustee?
- If you are going to surrender a policy for its cash value or allow the policy to run until it lapses, you must explore the life settlement option – every time. Your client, the grantor/insured, may resist the idea of a life settlement – some people are simply averse to it, but if you do not provide it as an option for any policy you are surrendering or allowing to lapse, you are opening yourself up to future litigation. It may be next year, or it may be ten years from now when the grantor/insured dies and the beneficiaries realize that nothing is coming to them.
- If a grantor has made you aware that no more funding will come to the policy, but it still has significant cash value you must still examine all options for the policy – including a life settlement, but also including other options such as reducing the death benefit to allow it to run until life expectancy or policy maturity. Aaron Hanson, who heads up our Remediation Department can provide guidance in that situation.
In our next blog entry, we will review the process of selling a policy. For more information about life settlements, review chapter 14 of the TOLI Handbook, available as a free download at TOLIHandbook.com.
- Life Insurance Settlement Association (LISA), February 2015 press release