More Older Clients Should Be Selling Their Life Insurance Policies

What You Need to Know

The Life Insurance Settlements Association estimates that 3,100 U.S. consumers sold their in-force life insurance policies last year.
Consumers let about 9 million policies lapse.
The author contends that some of those 9 million policyholders could have done better.

Starting several years ago, the Life Insurance Settlements Association began collecting data on the life insurance settlements market, which gives the policyholders a chance to sell in-force policies to investors.

LISA members represent 95% of the market. They submit data regarding the number of transactions they completed in 2022, the average face amount of the policies purchased, and other transaction details.

Here’s a synopsis:

3,100 life settlement transactions were completed.
$770 million was paid to consumers for the sale of the unwanted life insurance policies
$610 million was the difference between the total amount paid to the consumers and the amount the consumers would have received if their life insurance policies had been lapsed or surrendered
$250,500 was the average amount a policyholder involved in a life settlement received after completing the transaction.

Consider this: 9.28 million policies were lapsed or surrendered in 2021, and those policies had $624.2 billion in total face value.

According to LISA, policies with a total of more than $100 billion of face value are lapsed by seniors over age 65 each year.

This figure does not include the policy surrenders. Just the lapses.

The Reasons

This begs the question: Why?

The short answer is that clients find the policies unwanted, unneeded or unaffordable, and feel as if they have no other option but to lapse or surrender.

They are unaware that alternatives may be available, and that one alternative is the sale of the policy.

Clients may not consult their advisors before lapsing or surrendering.

Or, advisors may also not fully understand life insurance settlements. They may have misconceptions about how the market operates.

Think about the gap between the numbers: 9.28 million policies lapsed or surrendered, and only 3,100 sold.

Clients are missing out on a lot of value for their policies.

The Limits

To be clear, not all 9.28 million policies could be sold.

Some of these policies, such as many final expense policies, were too small to be sold, or the clients too were young and healthy. Cash value might have been very high relative to the face value, or the amount of policy loans taken might have been high.

A term policy that is coming up to the end of the term or end of the conversion period has no inherent cash value.

But many more than 3,100 in-force policies should have been sold.

Sometimes, the reason that a client purchased their life insurance policy 10, 20 or 30 years ago is no longer a concern, rendering the policy unwanted or unneeded.

If a policy did have a cash value last year, selling the policy generated five times more cash than simply taking the cash surrender value.

If a client is not going to keep a policy with a significant cash value, selling the policy is a better option than the client walking away with nothing.

The bottom line: Clients could be leaving money behind. Some could be losing tens of thousands or even hundreds of thousands of dollars.