With respect to the life insurance secondary market there are almost too many myths to count. Unfortunately, some of the misconceptions about the secondary market are purposefully perpetuated by life insurance companies that aggressively place their own profit margins ahead of their customers’ interests. But I’m not here to point fingers (in ears, eyes, or wherever). Instead, let me bust three of the biggest myths about repurposing life insurance and the life insurance secondary market once and for all.
Myth #1: The Life Insurance Secondary Market Preys on Seniors
The image is of a grandfather who, years earlier, dutifully took out a life insurance policy for the protection of his wife and children. Now, as Grandpa has gotten older, some slick company comes along and convinces him to sell his policy for pennies on the dollar, leaving nothing for his family for when he passes away.
Myth BUSTED: The life insurance secondary market actually helps seniors obtain maximum value for life insurance policies that are almost certain to lapse or be surrendered.
When seniors terminate their policies, they receive little or nothing in the form of a cash surrender value. When a policy is sold, the senior receives a fair market value that far exceeds that cash surrender value. Also, seniors are increasingly choosing to sell only a portion of their life insurance – thus, eliminating future premiums – to retain a portion for their beneficiaries.
There simply is no predatory aspect to the life insurance secondary market. It is a matter of fact that the vast majority of life insurance policies that are issued never result in a benefit paid to beneficiaries. An astounding 88 percent of universal life policies are either lapsed or surrendered prior to a claim, according to statistics cited by the Life Insurance Settlement Association.
The reasons policies terminate are many. It could be that Grandpa’s children are adults now, or his spouse has died, and thus there is no longer a need to protect his beneficiaries. It could be that Grandpa has sufficient assets to support his family in retirement and beyond, eliminating the need for the policy. Plus, federal estate tax laws have changed in recent years, so if he took out the policy to pay “death taxes,” that need is gone.
Often, however, seniors are forced out of their policies because premiums become too expensive to maintain in retirement. Last year, a number of insurance companies imposed rate increases on certain universal life insurance policies – some by as much as 100 percent or more – including increases targeted directly at seniors, as featured in a series of Wall Street Journal articles on the subject (see Retiree’s Stung by ‘Universal Life’ Costs, WSJ, August 10, 2015; and Life Insurers Pass Pain of Low Rates on to Consumers, WSJ, March 20, 2016).
This is precisely when selling, rather than surrendering, a policy is the best option for seniors and their families who face the real likelihood of losing their policies altogether for little or nothing.
Selling a life insurance policy on the secondary market can pay seniors an average of four to 11 times more than what they would receive from the insurer for a surrendered policy, according to studies conducted by the US Government Accountability Office (2010) and the London Business School (2013).
At GWG, we’ve paid seniors over $336 million to purchase their policies over the past 10 years. Had those seniors surrendered their policies back to their insurance company, they would have received just $23 million. That’s a difference of more than $313 million— or more than 10 times more than the insurance company would have paid.
In addition, GWG and other secondary market companies offer seniors the ability to sell only a portion of the policy’s death benefit, retaining as much as 75 percent for their loved ones. Retained benefits from a life insurance policy sale are a sound way for seniors to be relieved of the burden of paying increasingly costly premiums while still providing protection for their families.
So instead of receiving little or nothing for a policy that is being terminated, seniors receive substantially more if they sell their policies.
Myth #2: Secondary Life Insurance is an Unregulated “Wild West” Market
This myth paints a picture of shady players, risky transactions, and swindled seniors. No way an advisor would recommend such an unsavory transaction for their clients, goes the myth.
Myth BUSTED: Selling a life insurance policy through the secondary market is one of the most secure senior financial services available today!
Back in the mid- to late-1990s, the life insurance secondary market (the old, “viatical” market) was new and, as expected, not particularly regulated. Only a few states had any laws to regulate the transaction. That was then.
Today, 42 states covering over 90 percent of the U.S. population have modern laws governing the life insurance secondary market – most of which were either adopted or amended after 2007.
Now when a senior sells their life insurance policy, they are protected by stringent consumer protections, including numerous consumer disclosures, disclosure of all offers, broker commissions, and alternatives to selling a policy. All sellers are dealing with licensed buyers and brokers, and are presented with forms that have been approved for use by state insurance regulators. Furthermore, companies are required to adhere to Federal and state privacy laws that protect the personal, medical, and financial information of the policy owners.
And how about this for extraordinary consumer protection: most states have a provision that requires a seller’s own attending physician to certify their patient is competent and capable of understanding and entering into a contract to sell their own policy. In addition, GWG Life and other buyers require that the named beneficiaries of the life insurance policy consent to the sale. That is some serious consumer protection!
As a result of comprehensive regulation and industry practices, the National Association of Insurance Commissioners has reported that since the start of 2013 only four (YES – FOUR!) consumer complaints have been reported to insurance regulators nationwide. Interestingly, every one of those complaints was filed against an insurance company that may have been trying to interfere with the senior’s sale of the policy.
Today’s market is safe and sound for seniors to seek the maximum value for their unwanted or unaffordable life insurance policies.
Myth #3: For Financial Advisors, Repurposing Life Insurance Policies Isn’t on the Menu
Even for advisors who are aware of the value of selling a life insurance policy in the secondary market for their clients, many are under the impression that their broker-dealer or insurance companies won’t permit them to participate in the secondary market. Other advisors simply stick by the adage that they “don’t do insurance.”
Myth BUSTED: A financial advisor’s primary responsibility is to serve in the best interest of their clients.
Advisors have both a duty of competence and duty of care in the service of their clients. And, just as a CPA is held accountable for knowing the most recent tax laws, financial advisors are held accountable for knowing the most recent financial services options available. It is a value-added service to clients when you can help them unlock the secondary market value for their life insurance policies.
Selling a policy relieves the pressures many seniors face with increased premiums, helps seniors reinvest in their retirement, and helps fund their health care and long-term care needs. Wouldn’t you advise your own grandpa to sell his policy if he could get 10 times more for it? Wouldn’t you want him to know that he can sell all of it or keep a portion of the policy without future premiums, rather than just mail it back to the insurance company? If you would give this advice to your grandpa, why wouldn’t you give that same advice to your clients?
Importantly, repurposing a life insurance policy is a terrific way to grow your practice. GWG Life has partnered with a growing number of broker-dealers and financial advisors who understand that a life settlement is beneficial to seniors, as well as to their practices. These broker-dealers and advisors have done their diligence on the secondary market and on GWG Life and have authorized their advisors to work with GWG Life to introduce life settlements to seniors. Some advisors are holding local events to introduce the secondary market to new potential clients, as well as to other financial services professionals.
If a broker-dealer or insurance company tries to steer you away from selling your life insurance policy, it is in your best interest to press the discussion further. Find out the specific objections and address them head on. It is likely they are basing their positions on misconceptions or myths. The truth is the secondary market provides substantial value to seniors, is well-regulated, and provides a unique way to reconnect with old clients, recruit new clients, and grow your practice.
You don’t have to get grossed out to bust the myths about the life insurance secondary market. Instead, you will discover that it’s a valuable option for your clients – and your practice.