Miami Herald: A new lease on life insurance

December 14th, 2009

The Miami Herald published this article on December 14, 2009.

Seniors who need cash in the midst of the recession may want to consider selling their life insurance policies, some financial advisors say. ''Your life insurance policy could be your financial lifesaver,'' said Susan Bruno of Beacon Wealth in Connecticut. Bruno, a certified financial planner and accountant, wrote about the sales, called life settlements, for the Journal of Accountancy earlier this year.

The idea isn't new, but the strategy could be particularly useful now, when policy holders may find paying insurance premiums are an expense they can't afford or that they don't have any other financial resources that can easily be turned into cash.

The popularity of life settlements has been growing since before the recession. According to the Insurance Studies Institute, the market grew from an estimated $2 billion in the face value of policies sold 2002 to an estimated $12 billion in 2007, and by 2017, the market is expected to reach $31 billion.

The institute is in the midst of a study on the volume of life settlement sales. Even without specific numbers, ''we do know seller demand is up. There are more policies for sale that there are buyers,'' said Paul Siegert, president and CEO of the nonprofit Insurance Studies Institute in Colorado. Aside from needing cash, seniors should consider whether purpose the policy might have served for the named beneficiaries could be taken care of before death. For example, Bruno said, even if the policy is cashed in for less than it would have been worth in the long run, it could pay for a grandchild's college education.

The simplest way to turn the policy into cash is by selling it back to the carrier, but ''the only price they would give you was the money you had accumulated in the policy,'' Bruno said.

Policyholders also have the option of selling their policy for what is known as its intrinsic value -- which could be far greater than the policy's cash value. It may not be pleasant to think about, but the older you are, and perhaps the sicker you are, the higher your policy's potential value to a third-party investor, Bruno said. ''It's the opposite of buying an insurance policy,'' said Ellen Siegel, a certified financial planner in Miami. ''The sicker they rate you the more you get.''

Here's an example of how a life settlement could be more valuable than cashing the policy in from, which works with a life-settlement brokerage. A 68-year-old man with a $600,000 life insurance policy would have received $28,845 if he had surrendered the policy to his insurance company. Selling it on the market netted him $94,900 -- about $65,000 more than simply cashing it in.

Life settlements are targeted at seniors because, to put it bluntly, their insurance policies are most likely going to pay out faster than those of younger people in better health. ''If you're older and you don't have a lot of liquid assests and you don't need the death benefit, consider a life settlement,'' Siegel said.

The option may sound similar to a viatical settlements. That's the term for a similar method of cashing out or selling a life insurance policy, but those are for people who have a diagnosed terminal illness and need the insurance money to pay for medical care in their remaining years of life.