Cost-of-living: rising costs and available options to save life insurance
June 20, 2016 by Michael Krasnerman
Unexpected cost-of-living increases affect people of all walks of life. Even the best laid plans are not foolproof. There are unforeseen circumstances that cannot be avoided. Unanticipated costs can burden even the largest budget.
The Wall Street Journal recently reported a number of life insurance companies are increasing the cost of insurance, which is proving to be challenging. Even high-net-worth individuals are not immune and are looking at their options, and those especially vulnerable are senior citizens.
Having invested for years in their policy, clients may think continuing to pay premiums may seem like the only choice. One problem is this may not be the only increase. As the costs continue to rise, the burden can become overwhelming to a point where the policy owner chooses to surrender the policy. Too often a lapsed policy is the result of a lack of information. By not knowing every option that is available, insurers are losing money.
Life insurance professionals often prepare for increased costs through the cash value in the policy. Unfortunately, eating up the cash value and/or reducing the death benefit is a short-term fix that may not provide a long-term solution. What happens when there is no longer any cash remaining? Or, the death benefit has been reduced to the point where it is costing more to keep it enforce than what it is worth?
Many policy holders do not realize they have the possibility of selling the policy. Contingent on the circumstances, there may be a return on investment. This is dependent on the value, including the age and health of the insured. If the client is young and healthy, selling the policy will not be feasible. Even if in the best case scenario, it is a buyer’s market with investors expecting annual returns of up to 20 percent.
The advantage of selling the policy is getting something in return rather than nothing. The reward is immediate cash. The drawback is losing the death and tax benefit and the entire reason for investing in life insurance in the first place.
There is another alternative. This alternative allows the policy owner to keep the policy enforce, and they continue to receive the death and tax benefit. It also provides them with added flexibility without compromising their lifestyle. Seniors finance their house, their boat, their plane, and other large items so why not finance their premiums?
Unlike traditional premium financing, this new non-recourse premium financing is for enforce policies — not new ones. By utilizing the policy as the only collateral, unlike traditional lenders, there is no need to borrow against additional assets. Without any negative ramifications, the policy owner preserves their cash liquidity.
Such was the case with an older affluent individual with a multi-million dollar policy. Understanding the leverage of borrowing future premiums, they were able to secure financing for 10 years with little out of pocket cost. The savings afforded them the investment opportunity that they put into additional annuities without compromising their lifestyle. The policy owner, like many others, had very little cash value left in the policy and thought the only option was to surrender the policy.
With the continued increase in the cost of insurance and clients only getting older, this new non-recourse premium financing option in the next couple of years will bring enormous growth opportunities. Life insurance professionals will also reap the benefit of keeping more of their clients, and in doing so, have exponentially more money making opportunities.
