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Some Types of Life Policies Are Harder to Sell Than You Think

By Lisa Rehburg

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You may know that 500,000 seniors a year lapse their life insurance policies. They walk away with little or nothing. The reason? They no longer need or want the policy, or they can no longer afford it, and they do not know there is another option.

A life settlement can be a good solution for these types of clients.

(Related: Do Life Settlements Work in ILITs?)

But, not all of those 500,000 policies can be sold.

You may also know that all types of policies have the potential to be sold: universal life (UL), whole, term, second-to-die, group, etc.

Here are some examples of policies that are harder to sell than you may think. What seems like a good opportunity may be a challenge.

1. Policies That Have High Cash Values Compared To The Face Amount

Sometimes advisors think that a lot of cash is good for the buyers of life insurance policies. Maybe, maybe not. For instance, a client who has $180,000 of cash in a $200,000 policy. If the surrender charges are high, making the cash surrender value lower, that is helpful. If the cash surrender value is high, that could be difficult.

Why? Cash surrender values are a bar that a buyer’s offer needs to exceed. If the offer doesn’t, then why would a client sell? They could surrender the policy for more money. Therefore, if there is a very high cash surrender value as compared to the face value, the policy can be harder to sell, especially if the client is in good health or the premiums are high. Sometimes, policies with high cash surrender values do not receive offers at all, because the cash is so high.

2. Whole Life

These policies tend (though not always) to have much higher premiums than UL, relative to the face value of the policy. For instance, client has a $150,000 whole life policy with $13,000 in annual premiums. Looking at the math, unless the client has a relatively short life expectancy, this policy will be a challenge for a high cash sale.

However, the good news is there are buyers who like whole life policies for their performance. So even though the cash amount of the sale may be lower, the client can get out from under these high premiums.

3. Older Clients With Policies

Some advisors theorize that the older the client, the better, right? Yes, most of the time this is true, but not always. As you know, all policies are not created equal. A 95-year-old client—sounds good so far. Client is healthy — no problem.

The challenge? The policy terminates at age 100, and the premiums are $20,000 annually for a $100,000 face value. Looking at the math, it just doesn’t work.

Or, what about an 80-year-old client with a UL policy. He is paying $15,000 annually for a $500,000 face value. On the surface, so far, so good. He is healthy — no problem. The challenge? The illustration shows the premiums to carry the policy are $75,000 per year. The math simply doesn’t pencil out for a sale.

4. Convertible Term Policies

Convertible term policies are highly marketable. There is the good news. But, the conversion is the key. What do those premiums look like? Client is 74 ½ with a $2 million term policy, convertible until age 75. Client is healthy — once again, no problem. The challenge? The conversion was to whole life only, at $200,000 per year of premium. Looking at the math again, if this healthy client lives 10 years (and he should), the buyer would pay the entire death benefit in premium.

This article is not meant to discourage you from looking at life settlements. Just the opposite. Rather, it is to emphasize that life settlements can be a good option, but present the fact that, sometimes, policies that look like good opportunities on the surface, may not receive offers. Each client’s situation is unique.

Routinely, clients with high cash value policies, whole life policies, older clients and convertible term policies, sell their policies for more than the surrender value, making a life settlement a great solution. Considering life settlements for your clients who no longer want, need or can afford their policies can make a lot of sense.

Studies show that, on average, a life settlement garners three to five times cash surrender value. Even if your client does not receive an offer on their policy, you and they know, that all options have been considered, and they are not leaving any money on the table.

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Lisa Rehburg (Photo: Rehburg)Lisa Rehburg is president of Rehburg Life Insurance Settlements, a life insurance settlements broker. She can be reached at (714) 349-7981.

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