The New Old Age: Wringing Cash From Life Insurance

Paula Span
Paula Span
THE NEW OLD AGE

“We’re going to go through a quick, ten- to 15-minute personal health assessment,” said Jay Jackson, vice president of Abacus Life Settlements in Orlando. “There are no right or wrong answers.”

We were on the phone, doing an interview that would determine whether this company might offer to buy the life insurance policy — face value: $150,000 — that I’d bought decades ago.

I actually had no interest in selling, to Abacus or to any other so-called life-settlement provider. But I wanted to see how the process would unfold if I did.

So the questions began, with Mr. Jackson asking in a conversational way about my age, smoking history, marital status, ability to handle my daily activities. How old were my parents when they died? What type of exercise did I do? Any falls or dizziness in the last six months?

It comes as a surprise to many older adults that the life insurance policies they’ve been paying premiums on for years might bring them money while they’re still alive.

If a life-settlement company likes its odds of turning a profit, it will buy the policy, paying out more than the policy’s cash value — the amount received if the policy were canceled — but less than the face value, or death benefit.

The firm acquires the policy and continues paying the premiums. Then the company (or a big investor who buys bundles of policies) collects when the seller dies. It’s something like a reverse mortgage, but on your life instead of your house.

“There are so many seniors sitting on these assets, and they’re throwing them away,” said Chris Orestis, executive vice president of GWG Life, who points out that most Americans simply let policies lapse.

For now, life settlement remains a seldom-used option. About 1,650 Americans received settlements for their policies last year, according to statistics compiled annually by journalist Donna Horowitz for The Deal, a financial publication.

But the industry, which previously targeted the very affluent, has begun courting middle-class people who own policies with face values of $100,000 to $500,000. Moreover, in a business once heavily reliant on brokers as intermediaries, several companies now market directly to consumers — like Coventry, the largest life-settlement provider, which runs national TV ads.

GWG Life works with nursing homes and assisted living chains to reach people contemplating the daunting costs of long-term care. The policyholder can set up an irrevocable bank account to funnel the proceeds of the sale directly to a care provider.

The company’s strategy, as articulated by Mr. Orestis: “When a family walks into a community and says, ‘Jeez, we can’t afford this,’ everyone in the long-term care industry should say, ‘Do you have a life insurance policy?’”

Odds are, then, that you’ll be hearing more about this possibility. A business that began with so-called viatical settlements at the height of the AIDS epidemic is now coming after older adults.

Sometimes, selling makes sense. Older people may no longer need life insurance bought to protect a spouse who has since died or children who have reached financial independence. Perhaps rising premiums have become a financial struggle or other needs have grown more pressing.

At that point, most policyholders just stop paying premiums. They take the modest cash value, if there is any; if it’s a term life policy, there is no cash value. In any event, the insurer never pays a death benefit, an advantage the insurance industry has come to rely on.

“Insurance companies make money when people give up their policies,” said Kent Smetters, an economist at the University of Pennsylvania’s Wharton School, who has written about life settlement. “Now the life-settlement guys are coming in and offering better deals.”

Why sell a policy for a fraction of what it would bring your heirs? One Texan who sold his policy to Abacus took his family on an around-the-world cruise, Mr. Jackson said. But most use life settlements not for luxuries or fantasies, but for medical treatment or living expenses.

How much a policy will fetch depends on its face value and premiums (settlement companies buy whole life, universal life, term insurance or hybrids), as well as on your life expectancy. That explains Mr. Jackson’s questions about my health.

The industry calls this “reverse underwriting.” When you buy life insurance, companies offer a better deal if you’re young and healthy. To get an attractive price when you want to unload that policy years later, it helps to be old and sick.

Life-settlement companies and their investors don’t want to hold onto your policy, paying the premiums, for more than seven to 10 years. “The longer your life expectancy, the lower your offer,” Ms. Horowitz said.

But if your policy looks profitable, a life settlement typically amounts to 20 to 30 percent of its death benefit. That may represent a better deal than simply surrendering a policy, but it isn’t necessarily smarter than keeping it in force.

If you need money immediately and have a policy with cash value, you can borrow against it. If high premiums have become problematic, your beneficiaries might want to take over the payments to receive the face value upon your death.

Moreover, while a death benefit flows to your beneficiaries tax-free, life-settlement proceeds are taxable, to the extent they exceed what you have paid in premiums. And owning or selling the policy could stall or complicate the process of qualifying for Medicaid.

Then there’s the question of how much a broker, who submits your information to several life-settlement companies, will take in commission — generally 20 to 30 percent of the price a company offers.

You could avoid that by approaching several settlement companies directly, going through interviews, supplying documentation and then comparing offers. But some policyholders will appreciate having someone shepherd them through the process, especially given the industry’s somewhat dodgy past.

Sellers found it hard to ascertain whether they were receiving a fair price, for instance, and how much of it a broker was pocketing, the federal Government Accountability Office reported in 2010.

In response, 43 states have adopted life-settlement regulations, usually requiring that companies be licensed and make consumer disclosures. “The industry cleaned itself up a lot,” Dr. Smetters said. “But caution is appropriate.”

State regulations differ, and it still requires legwork and fine-print reading to know how much you’ll walk away with and to determine what’s in your interest.

“You have to really understand the contract you’re signing,” Dr. Smetters said. “If I were doing this, I’d try to find out who the major companies are and call myself. But I’d also sit down with a fee-only financial adviser experienced in this area and do the analytics. Is this a good deal?”

So, caution advised. But simply walking away, surrendering a policy you’ve already paid a lot for, rarely represents the best option.

“If my policy is worth $100,000 the day I die, is it worth nothing the day before?” said Darwin Bayston, chief executive of the Life Insurance Settlement Association, a trade group. “The answer is no.”

After Mr. Jackson and I finished the interview, he cheerfully informed me, “There’s almost no probability we’d buy your policy.” My life expectancy, according to Abacus models, is another 280 months, or 23-plus years.

No life-settlement provider or investor wants to hold onto a policy and pay premiums for that long before seeing a payoff.

The premiums on my whole-life policy are low and won’t increase. So I’ll keep writing semiannual checks for now, hoping my family will pocket the death benefit.

Still, scary news from an oncologist or simply the passage of time could upend that plan. Life settlement still looks somewhat tricky to navigate, but it’s an option to keep in mind.

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