For many seniors, selling a life insurance policy to someone other the company that sold it to them is a surprising idea. In fact, the concept of life settlement has been a financial planning strategy in the U.S. for more than 100 years.
It’s based on legal property ownership rights established for life insurance by the United States Supreme Court in 1911, a ruling that confirmed the practice of policy owners selling their life insurance to a third party. It emerged as an industry during the AIDS epidemic in the 1980s when patients, facing shortening life expectancies, accessed their life insurance policies to pay for their medical costs, a concept known as viatical settlements. From there, viaticals evolved into life settlements as companies began using models of mortality became more reliable..
As more investors were drawn to the asset class, consumer awareness grew and billions of dollars of death benefits were purchased from policy owners who discovered they had a secondary market outlet for a policy that they may otherwise lapse or surrender. During this period, regulators worked with the industry to develop and implement regulations to create a level market with consumer protections that are now in place in 45 states covering 90% of the U.S. population. Today there are numerous options for policy owners and agents to access the secondary market value of their life insurance and turn an unneeded death benefit into a living benefit.
The secondary market provides policy owners with access to a variety of solutions tailor-made for unique financial needs. Instead of abandoning a policy after years of premium payments, the policy owner can use this illiquid asset to create a lifetime income stream by exchanging the policy for an annuity. The owner could also address the expensive costs of long-term care by exchanging the policy for a tax-advantaged Long-Term Care Benefit Account. The policy owner could also elect to keep a reduced paid-up death benefit by exchanging the policy for a Retained Death Benefit without being responsible for any future premium payments. In addition, the owner could elect to take a lump-sum cash payment in exchange for their policy that on average could be seven-to-10-times greater than any remaining cash surrender value.
Propelling this healthy secondary market further are a number of favorable legislative and regulatory developments that have occurred in the state and federal government. Legislative leaders now understand the important role the secondary market can play in solving many of the financial challenges afflicting seniors and their families who failed to adequately plan for the costs of retirement, or brought on by health and long-term care related expenses. As the cost of long-term care has skyrocketed, life insurance could be a resource of assets, but, according to the American Council of Life Insurers, nine out of ten universal life insurance policies will be abandoned before paying out a death benefit.
A watershed event for the life insurance industry, and people in need of long-term care occurred on July 19, 2017 when the National Association of Insurance Commissioners released the policy paper Private Market Options for Financing Long-Term Care endorsing the life insurance secondary market as a viable option to help people pay for long-term care. In it,the NAIC pointed out the disparity between the cash surrender value of a life policy and its much higher secondary market value. This policy paper is an important step forward towards increasing the awareness of exchanging a life insurance policy for people looking for ways to pay for the expensive costs of long-term care.