Picture this, you have a 70 year old client who’s taken out $1 million life insurance to cover his family in the event that he dies young. He wants to protect his kid’s financial future so they could go to college and his wife would be able to continue her standard of living should something happen to him. He diligently paid for this policy year after year and never misses a payment. Fast forward 30 years: he’s retired and his kids are financially stable. This asset he paid towards for years no longer serves a purpose as his original reason for investing in it no longer exists. As his advisor, What do you recommend he do? Sure, you can go to the insurance company and they will give him pennies on the dollar to take the policy back in the form of surrender value. In my experience, offering this sort of solution is not an acceptable solution. I’ve written about life settlements in the past. Click here to read more but simply put, a life settlement can give this client 3-5 times money .So guess what insurance companies are now doing…They are offering their own enhanced cash surrender options to compete with the settlement market. What is this and should you pursue them?
Traditionally US Life insurers invested most of their premium revenue in bonds and other fixed-income instruments. The current low interest rates have depressed bond yields and increased the value of returns policyholders get on their premium dollars. A couple things these insurers have done: 1) They reduced the guaranteed return from 4% to 2%, this is great for insurers but bad for clients. 2) They started buying policies back themselves in the form of high level surrender values but they don’t let them lapse, they keep them on their books and pay the premiums and collect the death benefit when these people die.
Generally speaking, 90% or more of policies lapse. Meaning that the insured paid premiums sometimes for years but the insurer never paid out a benefit. We don’t want that so what do we do? We could take the cash surrender value or even this new enhanced cash surrender value. Or we could test the secondary market, what to do?
The payoffs from the insurance company are almost always substantially less than what a client could get in the life settlement market.The reality is that this is simpler for clients, but it’s not better. Want to know what your policy is really worth? Contact us today, we offer that and so much more..
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