Written by Jeff Smith
Discussing finances can be difficult, especially in relation to aging and mortality, but it’s an important discussion to have. There are a dizzying number of options for assistance, some of them being more worth pursuing than others. However, finding information about these options can be difficult.
Most educational materials give quick nods to things like Reverse Mortgages, Life Settlements, Government Funding, Insurance Options, Retirement Funding, etc. But the education ends at that “quick nod,” and readers often wind up even more confused than they were at the start. That's why we have created this series of articles, to educate older adults and their families on their financial options for long term care, with in-depth views of their individual options.
What is a Life Settlement?
A Life Settlement at its core is a method of liquidating a fixed asset - aka your life insurance policy. The industry standard is that a settlement offer is always higher than the surrender value of a policy, but lower than the death benefit. When a Life Settlement is finalized and an offer is accepted, the client signs over ownership of the policy in exchange for cash.
Life Settlement Value
The value of a Life Settlement offer is based on several variables including policy information, underwriting, and what type of Life Settlement company you choose to work with.
Policy Information includes the overall value of your policy, how much your current premiums are, policy loan amounts (if any), and policy cash value. Since the Life Settlement company takes over ownership of your policy, it is important for them to be aware of all of these variables beforehand, and they will play heavily into your offer. A policy with premiums that are a small percentage of the overall death benefit will always price better than a policy that has extremely high premiums for example.
Life Settlement companies use the same actuarial tables and underwriters that most major life insurance companies utilize. Life Settlement offers are heavily reliant on this underwriting, as it lays out the length of time that premiums are going to be paid as an average. This underwriting is based on medical records, historical averages, and the client's own account of their lifestyle.
Type of Company
The Life Settlement industry is comprised of several layers - at the bottom of the industry are lead generation companies, followed by Brokers, and then Providers. Lead generation companies forward clients along to actual Life Settlement companies, but do not actually involve themselves in the Life Settlement process. They are essentially Life Settlement advertisers that profit from a portion of a client’s settlement.
Brokers are further up the ladder, but they also serve as a “middleman” to the companies that actually purchase the policies. The amount of your settlement that a broker keeps varies, but it is often above 10-20%.
Providers act as direct connections to the capital within the Life Settlement industry, making them as close to the top of the ladder a client can get. A Life Settlement done with a provider is often called a “Direct” settlement. Providers typically profit from working with funders rather than taking a portion of their client’s Settlement offer.
However, no matter what type of company you decide to work with, make sure their niche is in the market, and how much of your offer they keep is clearly defined during the first call. If for whatever reason the representative is dodgy or unclear, end the call. Lack of transparency has no place in a major financial transaction.
Who Should Consider a Life Settlement?
The nearly industry wide rule-of-thumb when it comes to a quickly identifying potential for a Settlement is that healthy individuals should be at least 72 years of age. If you have minor health issues you should be at least 60 years of age, and if your health issues are major or terminal than you will likely qualify based on underwriting despite your age.
Life Settlements are a viable financial option in a number of different scenarios for seniors, but some of the most common include:
- Increasing cash flow post-retirement.
- Paying for long-term care including housing, medical bills, and various day-to-day needs.
- Getting rid of premiums that are no longer affordable while still getting value from your policy.
- A family business is sold or the owner retires and the key person insurance is no longer needed.
- An estate plan no longer needs the life insurance policy as an asset.
The Life Settlement industry has earned a leery reputation, primarily on the back of several companies that used illegal financial techniques to increase profits. Prior to regulations being put in place, unscrupulous companies would often pay the sick and elderly to take out policies with the intent to sell. The practice was quickly made illegal. Still, individuals have attempted it in recent history and been punished accordingly. Be on the lookout for this tactic if you begin looking into securing a Life Settlement for your own policy.
The unnecessary layers involved in some cases can cause potential settlement offers to be significantly smaller than they should be. It isn’t uncommon for an individual policy to see 3-5 companies before it reaches a provider who ultimately makes the decision to purchase. Always ask any company you work with to make it very clear if what their role is, and ensure that your case is being handled directly instead of through a lead generation company.
Tip: Search “[Company Name] Lawsuit" when you are considering a company to work with for your Life Settlement.
If you would have asked me a 10 years ago, I wouldn’t have brought up a Life Settlement as viable financial option. The industry was too unregulated, and elder financial abuse ran far too rampant. Licensing was rare or non-existent, and offers were often unfair. In 2017 however, I would absolutely suggest looking into a Life Settlement if you are of retirement age or suffering from a disease or illness. There is extensive industry oversight from state and federal lawmakers, licensing is mandatory in most states, and offers are the strongest they have ever been. Just ensure that any Life Settlement is done through a well vetted and reputable organization. As always, if you ever feel even remotely uncomfortable, step away.
If you or your loved one could use help discussing or planning financial options, we can help. American In-Home Care always refers qualified, screened, care providers that are compassionate and ready to help with a variety of services, and our Client Care Liaisons are standing by to answer your questions. Contact us at 1-844-505-0004 to schedule your free in-home consultation to discuss which care options are right for you and your family.