INSURANCE AS AN ASSET

Category: INSURANCE AS AN ASSET

Life Insurance is not a Disposable Product

“Don’t worry about it. We can always get another one.” (Or maybe not…)

We live in an increasingly disposable consumer culture. Many products, from razors to writing instruments, are designed to be used and thrown out – refills and maintenance are too much of a hassle. If something breaks, it’s often cheaper to buy a new one rather than fix it.

In the financial services world, more and more products have been adjusted in response to this trend toward disposal and replacement. Where many financial instruments once included either significant up-front fees or surrender charges that encouraged consumers to keep these investments for long holding periods, many financial institutions have altered their products to lower or eliminate these fees. Now you can change your investment allocations as easily as changing your shirt, and sometimes the “substantial interest penalty for early withdrawal” from a Certificate of Deposit isn’t really that significant. If it appears the old product is no longer performing, it’s easy to dispose of what you don’t like, then get what you think you want.

But there are some things that don’t work as well when they are treated as disposable items (marriage comes to mind, as does nuclear waste). In the financial products arena, life insurance is a financial instrument that doesn’t perform well when considered a disposable commodity. This is primarily because of the unique nature of life insurance.

First and foremost, the ability to obtain personally owned life insurance is conditional on your health. For many financial products, the only barrier to acquisition is money; if you have the cash, you can buy it. But obtaining life insurance requires the prospective insured to meet the company’s underwriting standards as well as pay the premiums.

As long as you are in good health, insurability may not seem like a major impediment. But life insurance is a future-oriented product. Both the insurance company and the policyholder expect the life insurance benefit will not be used today, but sometime later (hopefully, much later). If you decide – for whatever reason – to terminate a life insurance policy, you have forfeited the certainty of your insurable status. Any attempt to obtain life insurance in the future will require another underwriting assessment. Who knows what your health status will be in five, ten or twenty years? Since future insurability cannot be guaranteed, disposing of life insurance – for any reason – could be detrimental to your financial well-being because you may not be able to obtain replacement coverage.

Life insurance is unique in another way: It is the only type of insurance where the covered event – one’s death – is 100% certain to occur. And unlike many other types of insurance, the covered event isn’t subject to changeable definitions or adjustable benefit periods. Disability can be defined in many ways, auto insurance can limit exposure through deductibles, and a homeowner’s policy can differentiate between assessed value and replacement costs. But with life insurance, there is no wiggle room for defining what is or isn’t covered – you are either dead or alive.

The only adjustments to a life insurance policy’s terms come during underwriting (when the insurance company may accept, decline or charge a higher-than-normal premium to insure an individual life), or in the premium structure (this applies particularly to term insurance). For the most part, the terms you receive on the day the policy is put in effect will remain for the duration of the policy. If you are a healthy, slim, athletic non-smoker when you obtain the insurance at age 35, your premiums will reflect that status even if 10 years later finds you an overweight, cigarette-smoking diabetic. Since the general trend for everyone is declining health over time, it doesn’t make sense to dispose of a favorable insurability status. If anything, you want to keep it for as long as possible.

This awareness, that life insurance is not a disposable financial product, should prompt you to carefully consider the long-term disposition of your life insurance policies, whether they are cash value policies or level term insurance. If you have obtained a favorable rating classification from a life insurance company, you should consider how this asset (your insurability) can be enhanced or preserved.

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Nine Ways to Use Your Whole Life Insurance Policy to Get Cash

“The best things in life are free
But you can give ‘em to the birds and bees
I need money;that’s what I want!”
-from Money (That’s What I Want), written by Berry Gordy and Janie Bradford.

Recorded in 1959 by Barrett Strong, Money (That’s What I Want) struck a chord with the public (no pun intended), becoming the first hit record for Gordy’s Motown enterprise. The song went on to be covered by nearly 50 other recording artists and was named by Rolling Stone as one of “the top 500 songs of all time.”

For over 50 years, people have been singing along with the chorus, “I need money –  that’s what I want!” And for those with whole life insurance policies, there are several ways for policyholders to get “a whole lotta money” when needed. Here’s an overview of the ways to use your policy to get cash when needed:

1. Surrender Your Policy for its Cash Value.

Once seen as the “only” option if a policy was no longer wanted, needed, or affordable, many policyholders still take this option simply because they do not understand the other options available to them. This isn’t typically the option we recommend as you’ll surrender all policy benefits along with your policy… plus, you may short-change yourself.

2. Sell Your Policy

As we have talked about in our posts about Life Settlements, one way to get cash when you need it is to sell your policy and the rights to your death benefit. This option has only been widely available the last few decades, and it is increasing in popularity. Selling a policy can work well for people who are very elderly and/or suffering from serious health issues, both which increase the likelihood that there will be willing buyers. But what if you’re 50 years old and competing in marathons?

3. Withdraw Your Cash Value

If you are withdrawing below your “basis” (the amount you’ve paid into your policy), then you can withdraw part (or even all) of your cash value without penalties or taxes. You also don’t have to pay back what you withdraw, as it was your money to start with. This might be a preferable option to a home equity loan or borrowing from your 401(k) or IRA, as there are no penalties, taxes, or qualifying procedures. However, your cash value stops growing if you withdraw it, so you might want to consider the next option…

4. Borrow Against Your Cash Value

Typically, people borrow against their cash value by going directly to the life insurance company for the loan. Since the cash value is collateral and the company has that in their possession, this is also fast and hassle-free (no credit checks, pay stubs, or approval process). If the rates at your bank are better, you might be able to borrow from your bank instead, still using your cash value as collateral. (Ask your banker, or explore potential sources here.)

People and even financial advisors often talk about “borrowing your cash value.” But that is a misleading, inaccurate phrase. You don’t actually borrow the cash value itself (nor do you pay back interest to yourself, in spite of what you might have been told). If you’re borrowing from your insurance company, leveraging your cash value by borrowing against it.

5. Borrow Against Your Death Benefit

In some situations, you might be able to leverage your policy to borrow from a bank or a private individual, using your death benefit as collateral. As in selling your policy, this won’t be an option unless you are in your 80’s or 90’s. But depending on your situation, it might make more sense than selling your policy. And if you require the money for medical care – perhaps you are battling cancer or another serious illness – find out if your policy provides the following benefit:

6. Receive an Accelerated Death Benefit

Whether or not you have this option available to you will depend on what options and riders you chose when purchasing your policy. You’ll definitely want to get your policy reviewed or contact your life insurance company to see if you have an accelerated death benefit available to you. If you do, you may be able to receive a portion of the face value of the policy (the total value including the death benefit) by proving you have a qualifying diagnosis or condition.

7. Annuitize Your Policy

In contrast to borrowing against your policy, this is a non-revocable option that should be used only late in life with the guidance of a professional. Most insurance companies offer this option. Not unlike a reverse mortgage, this option will allow your policy to start paying you. You would select a time period, such as 10 or 20 years, life expectancy, or life plus a certain amount to the beneficiaries. You would receive a specified amount of income each month during that time frame.

8. Take Your Dividends Out in Cash

If you are just looking for “a little extra” cash to make the difference between surviving and thriving, this may be your ticket. Typically, the dividends from your policy are used to purchase paid-up additions, but instead, they can be received in tax-free cash up to your basis.

9. Set Up a Charitable Remainder Trust with your Policy

Charitable remainder trusts can be used to sell a highly appreciated asset (such as real estate, stocks, or a business) in a way that reduces capital gains taxes and also benefits the charity. It’s also a way for the person donating the policy to get an income stream, which comes from the charity who invests the money from the asset.

For more information on this and other options, see my book, Live Your Life Insurance. You can get a hard copy from Amazon or purchase it in downloadable digital ebook or audio formats at Partners4Prosperity.com.

Do you simply want to eliminate your premium payments? If you’re had your policy for awhile, that might be possible to do – while keeping your policy. Read “Stop Your Premium Payments… and KEEP Your Whole Life Policy!” to find out more.

Need help understanding your policy and your options? We can help! For a limited time, we are offering a No-cost, No-obligation, Life Insurance Policy Review. Whether you’re considering using your policy to get cash and want to weigh your options, or you simply want to understand the benefits of your policy, we’d love to talk with you. Get all the details here.

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Life Settlements: Why Seniors (even Celebrities) are Selling Their Life Insurance Policies

I don’t want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go too.”
– Jack Benny, comedian (1894-1974).

An on-air penny-pincher who pretended that he would sooner die than part with a dollar, the real Jack Benny was a kind and generous man. Also an excellent planner, his widow was well-taken care of after his death and even received a daily red rose from the local florist, a provision arranged for in his will.

Ed McMahon, the former co-host to Johnny Carson on The Tonight Show, was another generous celebrity. Gifted with an optimistic personality and a hearty laugh, McMahon lacked Benny’s budgeting and strategizing skills. (Perhaps he took more after the Celebrity Sweepstakes Winners he helped create….) In spite of decades of career success, McMahon lost his health in 2007, then nearly lost his home to foreclosure in 2008 before passing away in 2009 at the age of 86.

While Donald Trump reportedly may have assisted the aging, ailing celebrity to stay in his home, the McMahons were also helped by another friend who told them about Life Settlements. As Pam McMahon (Ed’s widow) reports, they were previously unaware that they could sell a life insurance policy, thus using it as a liquid asset in a time of need.

Ed McMahon carried multiple life insurance policies, and the premiums became an unmanageable burden to them, especially when injuries prevented him from working. According to a letter written by his widow Pam McMahon,Ed had more than one policy and they were able to sell one to ease their financial stress.

Interestingly enough, another well-known celebrity has chosen to endorse Life Settlements (and probably not because she needs a paycheck – this octogenarian is still red-hot in show business!) Actress Betty White has done commercials for a company in the Life Settlement industry and has gone on record stating that she “would encourage any senior who is considering letting their life insurance policy lapse to consider a life settlement.” (I can’t help but wonder if she is the friend who helped the McMahons with her advice….)

But there are many other reasons, besides financial stress, to consider selling a life insurance policy. The beneficiary may have passed away. The policyholder might simply wish to use the money differently, such as starting a business or sending a grandchild to a private college. The policy holder may have multiple policies and no longer need them all, or the policy may insure a “key man” in a business partnership who has retired.

Is selling your life insurance policy the only solution for seniors seeking cash? Absolutely not! Many seniors simply don’t qualify, and even if they do, it’s important to look at what option makes the best sense for your particular situation.

One advantage of a whole-life policy is that it gives you many options. For instance, the cash value can be used to pay up premiums so that no more premium payments are ever needed! Stay tuned and we’ll examine other ways to use your policy to obtain cash (while you’re still living) – withOUT having to sell your policy.

For more information on Life Settlements, we invite you to read about their history and rise as a new asset class and learn how they can help you truly diversity your portfolio. To learn more about investing in life settlements, watch this 10-minute video that explains life settlements in greater detail.

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Life Settlements 101: The Emergence of a New Asset Class

“So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.” – Justice Oliver Wendell Holmes, Jr.

In 1911, The Supreme Court case of Grigsby v. Russell established the policy owner’s right to transfer an insurance policy. Dr. Grigsby had treated a patient named John C. Burchard, who needed a surgery he could not afford. Mr. Burchard offered to sell Dr. Grigsby his life insurance policy in return for $100 and his agreement to pay the remaining premiums. Dr. Grigsby agreed, but when Mr. Burchard passed away about a year later, his claim to the benefits was challenged by R. L. Russell, an executor of Buchard’s estate. Russell won in Appeals Court, and eventually, the case reached the U.S. Supreme Court where Justice Oliver Wendell Holmes, Jr. delivered the opinion, encapsulated above.

The ruling placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as stocks, bonds, or real estate. As with other types of property, a life insurance policy could be transferred to another person. The policy owner could, at their discretion:

  • Name or change the policy beneficiary.
  • Assign the policy as collateral for a loan.
  • Borrow against the policy.
  • Sell the policy to another party.

In spite of this ruling, the practice of selling life insurance policies remained little used until the 1980’s AIDS epidemic in the United States. At that time, viatical settlements starting occurring on a regular basis. A viatical settlement occurs when a terminally or chronically ill person (generally with a life expectancy of two years or less) sells his or her life insurance policy to a third party for a lump sum. The third party becomes the new owner of the policy, pays the premiums, and receives the death benefit when the insured individual passes away.

Life Settlements work in the same way, except that the policyholder is typically over 65 (often in their 80’s or approaching life expectancy). Also called Senior Settlements, those seeking Life Settlements are not necessarily terminally ill. However, a chronic illness may be the impetus for the senior to seek a Life Settlement, as they can often use the extra right away for medical treatments or to improve their quality of life in their last years.

In 2001, The National Association of Insurance Commissioners (NAIC) released the Viatical Settlements Model Act which defined guidelines for sound business practices. This established regulations around this new industry and sought to protect policyholders and purchasers alike from fraud or abuse. The demand for Life Settlements has led the great majority of states to put regulations in place regarding the sale of life insurance policies to third parties. And for over a decade, the Life Insurance Settlement Association has worked with policy makers, regulators, the business community and consumers to develop such legislation and regulation.

Thus Life Settlements became a defined asset class, and many of the now-prominent Life Settlement Providers began purchasing policies for their investment portfolio using institutional capital. Very quickly, well-funded corporate entities transformed the settlement concept into a regulated wealth management tool utilized by high-net-worth policy owners who no longer needed a given policy, and by savvy investors seeking healthy market returns shielded from market whims.

Strong demand for Life Settlements policies continues to drive rapid market expansion that continues today. In 2008 alone, it was estimated that existing policies with a collective face value of $11.8 billion were sold by policyholders to investors.

Life Investments are an investing strategy that we recommend to appropriate investors seeking safe, reliable, well-performing investment alternatives to the stock market. For an overview of recommended strategies, see our most recent post, “Investing Outside the Box: Alternative Investments,”

If you would like more information about investing in Life Settlements, we’d like to send you a 19-minute video that explains them in greater detail. Click Here to find out how you can receive instant access to this video.


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Investing Outside the Box: Alternative Investment Options

Investing Outside of the Box“There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.” ~Mark Twain.

The word “investments” has become almost synonymous with stocks, bonds, and mutual funds, to the point that a “diversified portfolio” is a misleading term. To some investors, the term “diversified may imply that they should have stocks and bonds and mutual funds… or small and large cap stocks… or perhaps, stocks from tech, financial, healthcare and international business.

What’s the problem with that? As mentioned in the last post, the stock market a form of gambling. If all or most of your money is in the stock market, you’re at a LOT of risk. You’ve got no control and no guarantee of what the market will do. And even if you DO manage to invest in rising markets, chances are, the fees you’re paying will have a much larger impact than you realize.

Perhaps you’re wondering, “What’s left if I remove the stock market from my investment options?” For the uninitiated, it’s a bit like figuring out what’s left to eat on a wheat-free vegan diet. But there ARE alternative options… great options! Here are some of our alternative investment favorites at Partners for Prosperity, Inc.:

1. Bridge Loans.
A Bridge Loan is a short-term loan to a buyer who is typically in the process of both selling and purchasing or developing real estate. A Bridge Loan is secured by property that is in the process of being sold, in much the same way a pending tax refund is used as collateral that allows a tax-payer to pay a fee to a third party and receive their refund early.

The Bridge Loan allows someone selling (or simultaneously buying and selling real estate) to receive their funds early, while allowing the investors to easily participate in tangible, controlled real estate project. Bridge Loans have in the past returned profits consistently in the low to mid-teens, annualized – with no management fees. These are short-term investments, typically the money is repaid (with interest) in six months.

Best yet, unlike the investments that caused the stocks and even whole companies to crash down in 2008 in the mortgage meltdown, Bridge Loan borrowers are individually assessed and qualified. These are not loans that have been sold, re-sold, converted into stocks other investment instruments, and then packaged in bulk to hide deficiencies. These are simple, direct, secured loans that have been individually evaluated to protect both the investor and the integrity and reputation of the company we work with.

Bridge Loans have been offered by mortgage brokerages and even banks for years, but now it is easier than ever for individuals to invest in Bridge Loans, “be the bank”, and enjoy the benefits of helping qualified borrowers.

2. Life Settlements.
Most investors have never heard of Life Settlements, but they are quickly gaining popularity and favor with advisors and investors alike. Life Settlements, or Senior Life Settlements, as they are sometimes called, have created a multi-billion dollar secondary market for life insurance policies as well as a new asset class for retail investors. A recent study shows that Life Settlement transactions are expected to exceed 21 billion dollars by 2012!

If you’re wondering what a Life Settlement IS, a Life Settlement is simply the sale of an unwanted or unneeded life insurance policy by a senior citizen to a third party, typically a licensed Life-Settlement Provider. A licensed Life-Settlement Provider is a company that allows an investor to purchase a fractional interest in the eventual death benefit payout of an existing life insurance policy.

Life insurance policies may become unwanted or unneeded for many reasons. The beneficiary may have passed away. The premiums may no longer be affordable, or the policy holder may wish to use the money differently, perhaps for long-term care or medical needs. The policy holder may have multiple policies and no longer feel they have need of them all, or the policy may insure a “key man” in a business partnership who has retired.

Previously, Life Settlements were only able to be utilized by institutional investors such as banks, hedge funds, and other insurance companies. Analysis of performance of Life Settlements has demonstrated annualized gains ranging from high single digits to mid-teens or more, typically in ten years or less.

3. Life Insurance.
Life insurance isn’t so much a traditional “investment” as a place to store money and a tool that can give you multiple benefits. With the proper policy and the right strategy, a life insurance policy is like a “souped-up savings account.”
Some of the advantages of using life insurance in your overall investment strategy include:

  • Tax benefits. A “whole life” or insurance policy can allow investments to grow in a favorable tax environment.
  • Flexibility and control of your money. The cash value of a life insurance policy can literally allow you to “be your own banker.” When needs, emergencies or even great opportunities arise, you have access the money you need.
  • Having this flexibility allows you to consider and measure opportunity costs, thus creating benefits elsewhere in your personal economy.
  • Increased flow and usage of money. Life insurance allows one dollar to do the job of many, which is consistent with our 7 Principles of Prosperity. For instance, your premium payments create your death benefit and a tax-free gift to heirs while building up cash value that can be borrowed or borrowed against.
  • A guaranteed benefit. Whole life insurance is “permanent”, which means you can never lose your insurance due to a health crisis. And… you can even sell your policy if you wish to use some of your death benefit while you are alive!

Are You Ready to Invest “Outside of the Box”?

While many investors have succeeded by investing only in better-known vehicles such as stocks, bonds, and mutual funds, the market crash of 2008 and the instability and volatility of 2009 demonstrated that just because “everybody’s doing it” doesn’t mean it’s a good idea.

Bridge Loans, Life Settlements and Life Insurance can be safe, reliable, superior choices because these alternative investment options-

  • Are not subject to the whims of the stock market
  • Offer true portfolio diversification for the investor
  • Are not affected by global economic and political events
  • Offer excellent proven and predictable rates of return.

Stay tuned for more detailed information about these alternative investments in future posts!

Could your investing and financial management strategies use an upgrade? Take our Prosperity Pitfalls Quiz and see where you stand!

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This website is provided for informational purposes only. The information contained herein should not be construed as the provision of personalized investment advice. Information contained herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security or investment. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future.