How to Sell your client’s life insurance policies twice
By Felix Steinmeyer
Roughly 1.1 million life insurance policies owned by seniors over 65 lapse every year, with a total face value of $112 billion.
As a life insurance agent or broker, you might not think there’s much you can do about that. If your client no longer needs the coverage or can’t afford the premiums, you may feel like your hands are tied.
Fortunately, that line of thinking is incorrect. It is possible for you to help your client sell their policy for cash instead of allowing it to lapse, and earn some commissions for yourself.
Clients Can Sell their Life Policies
Life insurance policyholders can sell their policies to a third-party investor in what’s called a life settlement.
The life settlement provider typically pays between 10 to 50 percent of the face value — always more than the surrender value — and takes over the premium payments going forward. Then when your client passes, the provider receives the policy benefit.
The average payout is closer to 22 percent, so if your client sells a policy with a $500,000 face value, they can expect to receive about $110,000.
The payout is determined based on several factors. Specifically, the life settlement provider will consider your client’s age, health, premiums, type of insurance, and policy size.
Not just anyone can sell a life insurance policy, however. The ideal candidate is someone over 65 or 70 with a policy benefit of $50,000 or higher. There is, however, an exception to the age minimum if your client has a terminal illness and has less than 24 months to live.
In this case, your client could get a viatical settlement, which is designed to help terminally ill clients pay their medical bills and afford future treatments.
More than 90 percent of policies sold in life settlements are universal life policies, but whole life and convertible term policies are also eligible. Just be sure to convert the term policy before selling it, preferably to a universal policy.
Life Settlement Commissions
By working directly with your client and a life settlement provider to help facilitate a sale, you can expect to earn commissions between 5 percent and 20 percent of the selling price. So, if your client receives $110,000, you’d make between $5,500 and $22,000 in commissions.
Is The Client a Good Fit?
Life insurance settlements aren’t for everyone, but they’re a good idea for people in certain situations. If any of your clients fit any of the following situations, it might be a good idea to talk with them about selling their policy.
- They can’t afford their premiums
Life insurance is a long-term commitment, and sometimes a client’s finances change to the point where they can no longer afford premiums. This can especially be the case with universal life policies, where premiums can increase over time. In fact, some life insurance companies increased their universal life premiums by as much as 72.4 percent in 2015.
If your client can’t afford their premiums anymore, they likely have no choice but to surrender the policy. Since they can earn more through a life settlement, it could be a no-brainer for them to opt for that instead of surrendering.
- They no longer need the coverage
The need for life insurance is dynamic, and as your clients build wealth, they may come to a point where they can self-insure. In some cases, clients may have even gotten a permanent policy specifically to supplement their retirement income, and they’re ready to take the surrender value.
In either case, if your client is planning on getting rid of their policy and taking their surrender value, you could help them get more by choosing a life settlement.
- They need the cash now
If your client has a terminal illness and needs money to help pay their medical bills, a viatical settlement can provide that solution.
That said, an accelerated death benefit rider can also provide that needed cash, potentially without getting rid of the policy benefit altogether. So, if your client’s policy does have an accelerated death benefit, they may want to consider that first before opting to sell.
- Helping your client decide what to do with the cash
If your client is looking to sell their policy because they no longer need the coverage or can’t afford the premiums, they may not have thought about what they’re going to do with the money. And depending on the size of the payout, it’s essential to have a plan before they receive such a substantial windfall.
One solution is a single premium annuity. As you may already know, an annuity can guarantee a specific payout each year for the remainder of your client’s life.
With a single premium annuity, they can start getting payments immediately and still get the security of a fixed income going forward.
That said, it’s also essential for your clients to consider the tax implications of a life settlement. Gains beyond what your client has paid in premium less dividends received and withdrawals taken out are typically treated as a mix of income and capital gains.
This means that a big payout could result in a massive tax bill, so advise your client to work with a tax professional and leave some cash aside to pay taxes before starting a single premium annuity.
The only exception to these tax rules is if your client has a life expectancy of two years or less and does a viatical settlement. In this situation, there’s no tax liability.
Help Clients Make the Right Decision
A life settlement may sound like a good idea for your client, but it’s important to help them understand the pitfalls.
For starters, selling a life insurance policy can make it difficult for your client to purchase another policy in the future. In some cases, the insurer might outright decline the application. This won’t be an issue if they don’t need coverage anymore, but it can be in some cases.
Second, not all life settlement brokers are created equally. Some charge between 10 percent and 30 percent of the client’s payout in fees. However, with more direct-to-agent and consumer companies emerging in the industry, you could also attempt to broker your policy yourself.
And lastly, your client may be required to send health updates to the life settlement provider for the remainder of their life. If your client is worried about effectively signing over health privacy, they may want to consider other options.
A life insurance settlement can not only provide your clients with a lucrative way out of their policy but also a benefit to you in the form of commissions.
In addition to advising your client personally, recommend that they also speak with a tax professional and even their financial advisor to make sure they’re making the right decision. As always, the most important thing is that you keep your clients’ best interests in mind.
Educate them on their options, explain the benefits and drawbacks of each, and empower them to come to the right conclusion on their own.
Felix Steinmeyer is the chief executive officer of Mason Finance Inc. of San Francisco. He is a licensed life insurance settlement provider and member of LISA.