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Get a Life: Are These Policies Actually Worth Settling for?

December 11, 2008 By:
Frank Rosci, JE Feature
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Paul Aguirre

As a way to increase their income, at a time of national economic crisis, a number of older people are selling their insurance policies that they no longer need or want.

That's according to Paul Aguirre, president, Equity of Life, LLC, in Plymouth Meeting and Skippack, a company that focuses on life settlements -- either the sale or assignment of a life-insurance policy to a financial institution for a lump sum cash payment -- for people 65 years old and older, who aren't terminally ill, and who have a life expectancy greater than two additional years.

Says Aguirre, the practice appeared first in the 1980s, in an atmosphere of less-than-scrupulous intentions by a number of sellers and buyers. At the time, life-insurance policies were sold to terminally ill patients, those expected to live for less than two years -- known as a viatical settlement -- then bought back for little money, when those policyholders needed cash desperately to pay medical bills.

Buyers would then cash in the policies for more than they paid when the insured died, having effectively gambled with the patient's life, since the longer the insured lived, the less profit buyers made, Aguirre said.

But in today's market, he continued, the idea has evolved, through compliance regulations, into a legitimate, honest and equitable pursuit.

The overwhelming majority of life-insurance policies never result in a death benefit being paid, Aguirre said, since they either lapse or are surrendered to the originating company for cash value. Nine out of 10 policies are handled in this way, he added.

"Life insurance -- one of the most widely held investments in the country -- has always been one of the most-effective strategies to help protect against the unexpected. Over the years, it has provided protection for husbands, wives, children and estates.

"As time passes, all too many policy owners decide they no longer want or need the protection that life-insurance provided them when they purchased it originally. As mentioned, until recently, these policy owners' only option was to [have] lapse or surrender their policies," Aguirre explained.

Really Big Business

Last month, Time magazine reported that the life-settlement market has grown from almost nothing 10 years ago to $13 billion today, with expectations of reaching some $160 billion in the next few years, while policies held by those 65 and older are estimated to be worth $500 billion. There are about 50 life-settlement companies, such as Equity of Life, Peachtree Settlement and J.G. Wentworth.

Equity of Life, Aguirre said, offers policy holders a good opportunity if they may be contemplating retirement, or no longer have the kinds of pressing needs life insurance was purchased to protect against. Earlier in life, for instance, Aguirre said, policy owners might have had a mortgage and kids at home.

"When John Doe, for example, was 45 years old, he had three kids and a mortgage; and he may have purchased a $2 million life-insurance policy, so that if anything happened to him, his children could go to college and the mortgage was paid.

"Now John is 70 years old, his house is paid off, and his children are out of college. He still pays premiums on his policy, but he doesn't really need it anymore. Instead of surrendering the policy for whatever cash value it may have, he may be able to sell the policy to an investor for up to four times the cash surrender value.

"That investor will continue to pay the premiums, and will collect the $2 million when John passes away," Aguirre explained.

Life insurance is an asset, and policy owners, through a life settlement, have the ability to realize the fair market value of their unwanted life insurance, he stated.

"A life settlement is especially advantageous for individuals age 65 and older, whose current life-insurance policies have outlived their usefulness and for whom, perhaps, premiums have become a burden."

Life settlements can provide a lucrative exit strategy for clients whose life-insurance policies are either underperforming or have become unnecessary.

In addition to allowing people to enjoy the rest of their lives with a lot less worry about money, cash garnered through a settlement also allows people to take care of medical expenses, replace expensive coverage with a more cost-effective alternative, and buy long-term health insurance.

"Half the time, when we do a life settlement, most policyholders go on to purchase new insurance of various kinds," said Aguirre.

At Drexel University's LeBow College of Business, Michael Gombola, department chair/finance department, talked about life insurance and the life-settlement market.

"The whole life-death benefit and cash-surrender value might be far apart, and get farther apart when someone is young and as someone grows older; in fact, they never get very close together. A $100,000 policy might have a cash surrender value of $15,000 to $20,000.

"It's all about discounting and moving money around, so it's very common that you get a situation where the policy can be sold for more than the cash value to a company that assumes the premiums and would get the full value upon the original owner's death," said Gombola.

David Mittleman, who has been in the insurance business since 1950, and is owner of the Mittleman Agency Inc., a brokerage firm in Wynnewood, is not in favor of life settlements.

"I hear a lot about the basic concept of this idea in advertising on TV, but, in my opinion, this is a very, very bad idea, because older people will use up the cash they get and have nothing left for themselves for their final arrangements and their burial; and will have nothing left to pass on to their beneficiaries.

"Also, once their policy is gone," continued Mittleman, "they will have to pay an arm and a leg in premiums for new insurance because of their age, if they can get it at all; so they should keep what they've worked so hard to accumulate over the years and not sell their policy."

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