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Many clients have life insurance policies they view as unnecessary because the policies no longer meet their original needs. It is estimated that the potential secondary market for life insurance policies exceeds $18 billion annually.
Before clients abandon old policies, cash flow professionals should step in and help them recover the potentially significant wealth that may be trapped there. They can help both individual and corporate clients or employers sell the right to collect on these otherwise dormant assets in the aftermarket.
Growing Market
1. In 1990, only six companies made an active secondary market. They purchased about 500 policies with a face value of between $40 million and $50 million.
2. Today, the Federal Trade Commission estimates that $500 million in life insurance policies are sold annually on the secondary market.
3. Actuarial data suggest 40 percent of all policies on people age 65 and older will not be held to maturity.
4. The National Association of Insurance Commissioners estimates that in 1996 nearly $1.5 trillion face amount of life insurance policies expired, lapsed or were canceled by policyholders. Each policy was a potential source of wealth had the owner sold it on the secondary market.
Consumers have long viewed life insurance merely as a means of providing liquidity to pay estate taxes, to protect surviving family members, to fund buy/sell agreements or to meet other business needs. Based on this narrow view, it’s no wonder so many individuals fall into the trap of agreeing to allow unneeded policies to lapse or be surrendered for just their cash values. This is especially true if the coverage is no longer necessary and the premiums have become burdensome. However, this is highly not advisable since such policies often have a secondary market value far exceeding their cash value.
Example: A 71-year-old individual owned a universal life policy with a $4 million face amount and a $200,000 cash surrender value. The individual sold the policy for $580,000 rather than let it lapse, cancel it or take the cash value. The client invested his settlement amount, and the agent commission was $100,000.
Identifying the Right Circumstances
Many types of insurance policies qualify for settlement, including term, whole, variable or universal life, any type of survivorship, adjustable life, joint first to die and group (if convertible). The aftermarket for life insurance operates in two areas-viatical and life settlements-each with different tax implications.
Viatical settlements involve the sale of a policy insuring the life of someone who is either terminally or chronically ill. Proceeds are free of federal income tax and state income tax in some states (such as New York and California) since they are considered a death benefit.
Life settlements are for people without the health problems required for viatical settlements but with a life expectancy of 15 years or less. According to current mortality tables, this means males age 70 or older and females age 74 or older. Sometimes the insured has simply outlived his or her family or beneficiaries. Some examples of changing circumstances that could trigger the opportunity for a life settlement transaction:
- Change in estate size
- Change in health condition
- Divorce/Bankruptcy/Retirement
- The need to exchange high annual premiums for monthly income
- Premiums no longer affordable
- Sale of a business
- Surrendering of a policy or one in danger of lapsing
- Change in tax laws
- Need of funds for alternative investments
- A family trust that has eliminated the need for life coverage
Businesses may also benefit from selling a policy in the secondary market to purchase an interest in another enterprise, facilitate the transfer of a business to the next generation, repay debt, or buy back stock from a partner or shareholder.
Secondary Market Criteria
While there are some size limits on policies a consumer can sell in the secondary market, the usual face value is around $1 million. Many buyers, however, routinely purchase policies worth significantly more. Companies will even buy a partial interest in a policy. The lower the cost to carry the policy and the faster the expected payment, the more attractive an offer a policyholder is likely to receive. Companies that buy life insurance policies in the aftermarket use these criteria to determine the price to offer:
- Policy face value: Depending on the buyer, the minimum face value is usually for life settlement $100,000 and viatical settlement $10,000.
- Insured’s age: The older the insured, the higher the offer.
- Health impairments. The more severe the health condition, the higher the likely offer.
- Existing policy structure
- Existing policy value
- Existing policy premium. The potential buyer uses this to determine the cost
of maintaining the policy until maturity.
A major transformation of the life settlement business within the next few years will bring phenomenal growth and an enormous money making opportunity for the individual who embrace this business. Cash flow professionals today have an extraordinary opportunity in the life settlement industry, and the capital created from this transactions empowers their clients to purchase a product that better suits their current needs.
Written by: Vernon O. Eschenburg, CMI, DCFS president of the Mobile, Alabama Chapter of ACFA. He is a life and viatical settlement representative and a master agent. He is vice president of HDMInc, 6605 Chimney Top Dr. S, Mobile, AL 36695-2615. He can be reached at (251) 607-0610 or by fax at (251) 607-9598.

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