Financial bonanza

Seniors battered by the tough economy are selling their life insurance policies to replenish their retirement nest eggs.

Unlike younger investors, older adults may not have time to wait for the market to recover their losses, so they’re turning to this previously overlooked asset to see whether they should sell it and use the money to pay medical bills or other expenses.

Seniors sold life insurance policies with a face value of $11.8 billion last year, almost double the value of policies sold just two years earlier, according to the U.S. Senate’s committee on aging, which recently held a hearing on such transactions.

A "life settlement," as a sale is called, may be an attractive option for seniors who determine they no longer need their life insurance policy, said Doug Head, executive director of the Life Insurance Settlement Association, an industry group.

Policyholders typically sell their insurance through life settlement brokers to investment companies for lump sums that are usually several times greater than they would receive if they surrendered the policies to the insurance companies, he said.

The new owners pay the remaining premiums and become the beneficiaries when the original policyholders die.

But a life settlement doesn’t always make sense, experts caution, and seniors considering such a sale should consult with an independent financial adviser to figure out whether it’s the best move.

"If you’re thinking about selling your life insurance mostly because you’re strapped for cash, there may be other ways to tap the value of your policy without losing your coverage," said lawyer and insurance expert David McDowell.

"You may be able to take out a loan against your policy or receive a partial payout through an accelerated death benefit," he said. "It’s worth visiting with your life insurance agent and exploring the option."

"The best candidates for a life settlement are now people in their 70s or older who have a life insurance policy valued at $500,000 or more that they no longer need, perhaps because their spouses have passed away," said Scott Gibson of Lewis and Ellis, an actuarial consulting firm.

Though the amount that seniors receive for their life insurance will vary depending on their age, gender and health, the average payout today is slightly less than 20 percent of the policy’s death benefit, said Russel Dorsett, co-managing director of the Select Life Settlement Corp. in Houston.

"That’s still three or four times more than they’d get if they simply surrendered their policies to the insurer," he said.

Still, selling a life insurance policy is often a complex transaction involving time and paperwork, so consumers should turn to financial advisers who know the risks, said Ana Smith-Daley, a deputy insurance commissioner for Texas.

"An independent adviser can help you decide whether selling your policy is in your best interest," she said. "If it is, the adviser will probably call on a broker to shop around your policy to determine what kind of price it will fetch."

Seniors also need to understand that their medical records will be examined as part of the sales and that the buyers of their policies will occasionally check on them to determine when to collect the death benefits, she said.

Smith-Daley said sellers may also pay taxes on the proceeds from a life settlement and lose their eligibility for Medicaid or other government benefits, so anyone contemplating a sale should consult a tax adviser or lawyer.

But even with those considerations, industry officials expect life settlements to exceed $100 billion over the next couple of decades as boomers convert unwanted or unneeded life insurance to cash to bolster their lagging savings.

"Under the right circumstances, it’s a viable and valuable option that will only become more popular," Gibson said.

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Filed under: management by Pascal