As an advisor, understanding all the options available to your clients is crucial to making informed decisions and providing the best guidance possible. Life settlements are one such option that many financial and insurance advisors are unfamiliar with, often because of misunderstandings or misconceptions surrounding the process. Life settlements can be an excellent tool to help clients who are struggling with high premiums, excess life insurance, or who simply need a liquidity solution. However, there are several myths about life settlements that may hinder advisors from fully exploring this option for their clients.
In this blog post, we will debunk some of the most common myths about life settlements, clearing up the confusion, and empowering you with the knowledge you need to help your clients make the most of this valuable financial tool.
Myth 1: You Have to Be Terminally Ill or Extremely Unhealthy to Qualify for a Life Settlement
One of the most widespread misconceptions about life settlements is that only people who are terminally ill or in poor health can sell their life insurance policies. While it’s true that health does play a role in determining the value of a life settlement, it’s not a strict requirement that the insured be terminally ill or extremely unhealthy.
Health Matters, But Not Necessarily in a Severe Way
The key factor in determining the life settlement value is the life expectancy of the insured. While the more health issues an insured person has, the higher the life settlement payout can be, health issues don’t necessarily have to be severe. For example, a policyholder with moderate health conditions or someone who is simply aging may still qualify for a life settlement that could significantly benefit their financial situation. In many cases, a life settlement can provide the insured with a lump sum that is higher than the policy’s cash surrender value, which can help meet other financial needs.
Life Settlements for Healthy Insureds
Some life settlement funders also purchase policies on individuals who are in good health, depending on the type of policies. For example, some life settlement providers may look for policies that are more likely to have a longer-term value, such as universal life policies with larger death benefits. So, the idea that life settlements are exclusively for the terminally ill is a misconception that can prevent advisors from exploring life settlements as an option for healthy clients who simply want to free themselves from the financial burden of a policy.
Myth 2: Are Life Settlements Even Legal?
Another common question is whether life settlements are legal, given the complexity and sensitivity of the transactions. Life settlements have been regulated and are legal in 43 states across the U.S. It’s important for advisors to understand the regulatory framework surrounding life settlements, but rest assured, life settlements are a legal and established financial tool in the U.S.
Legal and Regulated
Life settlements are not only legal but are also regulated in 43 states. Each state has its own set of rules and regulations regarding life settlements, ensuring that these transactions are conducted fairly and transparently. In unregulated states, life settlements can still take place, but the legal protections may be fewer, so it’s important to be aware of the state laws and consult with professionals who can provide clarity on the specific rules.
The Historical Legal Precedent
The legal basis for life settlements dates back to a landmark Supreme Court ruling in 1911 in the case of Grigsby v. Russell. In this case, the court determined that a life insurance policy is considered property, which means that it can be transferred or sold. This ruling solidified the legality of life settlements, establishing the precedent that life insurance policies are an asset that can be sold, just like any other property.
Myth 3: Life Settlements Are Only for Large Life Insurance Policies
Many advisors assume that life settlements are only worth pursuing for large life insurance policies with death benefits of $1 million or more. This is a misconception that can limit clients’ options when it comes to their life insurance policies.
Small Policies Can Qualify Too
In reality, policies as small as $100,000 can qualify for a life settlement. Even though smaller policies may not provide the same large payouts as larger policies, the proceeds from a life settlement can still be significant and help meet important financial goals.
The Unexpected Benefit for Smaller Policies
For clients who have smaller policies, the proceeds from a life settlement can be unexpected, often providing a helpful financial windfall when they need it most. A smaller life settlement payout can help clients who are struggling with expenses, looking for ways to improve their financial situation, or seeking to reduce financial burdens like life insurance premiums. It’s important for advisors to know that smaller policies are not automatically excluded from the life settlement market.
Myth 4: The Offers Are Too Small to Make It Worth It
Another myth surrounding life settlements is that the offers are too small to make it worthwhile. Many advisors may feel that life settlements are only for clients with large policies, and that the offers they would receive wouldn’t be substantial enough to make the process worth the time and effort.
Life Settlement Offers Can Be Substantial
While life settlements may not always yield the same high payout as the full death benefit, the offers can range anywhere from a few percent to 80% or more of the policy’s death benefit. The amount depends on various factors such as the type of policy, the client’s health, and the life expectancy of the insured.
Every Client’s Situation Is Different
Each client’s situation is unique, and the financial benefits of a life settlement depend on a variety of factors. For some clients, even a small percentage of the death benefit can make a significant difference, providing them with the liquidity they need or relieving the burden of costly premiums. It’s important for advisors to understand that life settlements are not a one-size-fits-all solution, but can be a valuable option for many clients.
Myth 5: Term Policies Don’t Work for Life Settlements
A common misconception is that term life insurance policies are not eligible for life settlements. This is not entirely accurate. While term policies do present a few unique challenges, they can still work for life settlements under certain circumstances.
The Conversion Privilege
Term policies can work for life settlements as long as the conversion privilege has not expired. The conversion privilege allows a policyholder to convert their term life policy into a permanent policy (such as universal life) without a medical exam, which can significantly improve the value of the policy in the context of a life settlement.
Knowing the Conversion Expiration Date
It’s essential for clients to be aware of when the conversion privilege expires, as this date can impact the life settlement options. Typically, the conversion privilege expiration date coincides with the end of the level term period or at a specific age (for example, 65 or 70).
What Happens if the Conversion Privilege Expires?
In some cases, term policies can still work for life settlements even if the conversion privilege has expired, but this usually requires the insured to have significant health issues. After the level term period ends, premiums can become extremely expensive during the “Annual Renewable Term” (ART) period, making the policy less attractive to the insured. However, in cases where the insured’s health is compromised, these policies can still be eligible for life settlements.
Myth 6: The Life Settlement Process Is Cumbersome
Many advisors assume that life settlements are complex, time-consuming, and difficult to navigate. While it’s true that the life settlement process involves several steps, working with a full-service firm like SFS Life Settlements can streamline the process and make it more efficient.
Simplifying the Process with Full-Service Firms
At SFS Life Settlements, the process is simplified through high-touch communication and clear guidance every step of the way. A full-service firm will collect all necessary insurance and medical information at their cost, making the process easier for the advisor and the client. Working with professionals who specialize in life settlements ensures that everything is handled efficiently, reducing the time and stress involved.
Clear Communication and Support
At SFS, advisors and clients are kept in the loop with regular communication, creating clarity throughout the process. Advisors can choose to work directly with the firm or involve the client, depending on what is more convenient and efficient for the situation. This flexibility ensures that the process is as smooth as possible.
Simplified Closing Documents
The closing documents involved in a life settlement transaction can be voluminous, but SFS Life Settlements makes it easier for advisors and clients by providing detailed notes and tagging the documents to show where to fill out and sign. This approach minimizes confusion and helps keep the process moving smoothly.
Conclusion
There are many myths about life settlements that can prevent advisors from fully exploring this financial option for their clients. By debunking these myths, we can empower advisors to better understand how life settlements can be used as a tool to help clients meet their financial goals, whether they are facing high premiums, liquidity issues, or simply need to offload an unwanted policy.
Life settlements are legal, can work for policies of all sizes, and are not just for those in poor health. Working with an experienced firm like SFS Life Settlements can streamline the process, making it easier for both advisors and clients. By breaking down these misconceptions and educating yourself and your clients, you’ll be better positioned to offer the best solutions when it comes to life insurance and life settlements.
If you’re ready to learn more or need assistance navigating the life settlement process, don’t hesitate to reach out to SFS Life Settlements for expert guidance and support.