Profiting from Longevity, Part II
by Richard
So, what is it that wealth managers and undertakers have in common?
I suppose it’s the ability to deal with life and death issues in a matter-of-fact manner.
It’s a trait not shared in the general population, where vast numbers are recklessly uninsured or under-insured, and where even the most rudimentary wills are not in place.
And now a new wrinkle. In the topic we introduced in our prior post on longevity, one of the hottest trends in life insurance is the burgeoning life settlement market.
Let’s see if we can define the pros and cons to help you in your own decision making.
Reasons to Say “No”
First of all, if your life insurance is in place to serve a specific and desired purpose, such as payment of estate taxes or for legacy purposes, or for the support and maintenance of survivors, this is not an option you should pursue.
You need only look at how impulsively holders of structured settlements have glommed on to this ploy.
Just this week I caught a commercial where the actors were shouting out the window…”I want my money and I want it now”. Sure enough, there is a market for your structured settlement.
And you can be sure that the yield to maturity on the structured settlement stream of income payments will benefit the buyers more than the grab for the cash will benefit the urgent seller.
In any negotiation, the impatient side is destined to come up short.
Reasons to Say “Yes”…
The ones who should consider the option are those who hold life insurance that serves no ostensible purpose. If you’ve raised and educated your children, paid off your mortgage, and diligently funded your retirement accounts…and if your estate is under the threshold for death taxes ($3.5 million starting in 2009)… and your heirs have already been amply provided for…the least you should do is put your policies out for bid to see what you might gain.
Just as term life insurance is a bargain for the young, so it is a burden to those over 65, no matter how healthy you are. The actuarial tables do not lie, and insurers must hedge their bets.
You can be sure the buyers will have a sharp pencil, and will rely on median life expectancy to provide them their desired rate of return.
On the other hand, you may have valid reasons for wanting to cash out, such as helping your children launch a new business. Or for a charitable bequest. Or maybe to treat your extended family to a never-to-be-forgotten exotic getaway.
Or maybe you are just tired of bearing the premium burden and want to put this monkey on someone else’s back.
…And Beat the Lapse Rate in the Process!
Last but by no means least, maybe you would like to stick it to the insurance industry, whose rapacious, grasping agents oversold and over-insured you in the first place.
One of the engines that drives profit to the life insurance industry is a nasty little concept called the lapse rate. Just as they can predict how long, on average, you will live, so can they also predict what percentage of policy holders will let their policies expire.
This is the lapse rate, and it is pure gravy to the insurer. They keep the premiums, and they are off the hook for any contingent payout. They are home free. Or they thought they were.
The life settlement option means you don’t just have to walk away from your abandoned policy. Someone is waiting in the wings to step up to the plate to continue the policy, and in doing so they wreak havoc on the insurer’s cherished lapse rate.
You get a bundle of cash while you are still alive to enjoy it. The investors earn at best a variable return on their premiums. Best of all, the insurer is still liable for the full death benefit.
And you can push back from the table with the winning chips…just by being able to fog a mirror every morning for a little longer than the life settlement/life insurance suits predicted.
