As a financial advisor or life insurance professional, you’ve likely heard of life settlements, often referred to as “viaticals”. Perhaps you’ve even recommended a life settlement to a client in financial need, or one who no longer needed to support beneficiaries.
Life settlements can most certainly be a valuable transaction for clients in need of funds, but they aren’t the only financial solution that a life insurance policy offers. A life insurance advance, like Fifth Season’s Funds For Living Program, can also provide enormous benefits to clients that qualify. In particular, clients diagnosed with an advanced-stage illness should look closely at their options to determine which platform makes the most sense for their needs.
First, it’s important to understand the fundamental differences between the transactions.
Life Insurance Settlements
- A life insurance settlement represents the outright sale of an existing life insurance policy to a third party for less than its death benefit, but more than its cash surrender value. This provides a lump sum to the original policy owner, while the third party investor assumes the payment of the policy’s premiums and then receives the death benefit upon the passing of the insured.
Life Insurance Funds For Living Advance
- Instead of an outright sale, a life insurance loan provides the policy owner with an advance on their life insurance policy’s face amount. The life insurance policy remains in place but fees and interest are accumulated, but not paid until the death of the policy owner. Like a settlement, the premiums are assumed by the company that is paying the loan. When the insured dies, the fees, interest and premiums are repaid from the death benefit, and any remainder goes to the named beneficiary.
The benefits of a policy advance vs. a sale may make that a better option for your clients with serious illness:
- TOTAL FUNDS PAID – a policy sale will provide your client with a one-time lump sum payment (usually somewhere between 20-70% of the face value of the policy), but no beneficiary payout. A life insurance loan typically provides two payments – one to your client and one to their beneficiaries. In more than 90% of their cases to date, Fifth Season’s clients have had funds remaining in their accounts to pass on to beneficiaries. And to date, between the advance and the beneficiary payout, Fifth Season’s clients have on average retained over 82% of the face value of their policies.
- TAXES – proceeds from the sale of a life insurance policy may be taxable, while the proceeds from a life insurance loan are generally non-taxable.
- TIME – the process that is involved in a settlement is often time consuming, taking up to three or more months, where life insurance loans require much less paperwork and time and can generally be accomplished in a matter of a few weeks.
- PARTIES INVOLVED – a life insurance loan is obtained directly through a funding source, with one point of contact. In contrast, viatical settlements require finding an investor that reviews the particulars of your client’s health and expected survival. In addition, with a viatical, the client’s policy may be shown to multiple intermediaries, brokers, insurance providers and potential purchasers, and may be sold multiple times during his/her lifetime. This could lead to hundreds of exposures of your clients’ personal, financial and health records.
- OPTIONALITY – if your client changes his/her mind and wants their policy’s benefit restored, or has a change in health status, the client has no recourse with a viatical. Once the policy is sold, the transaction is completed and your client accepts the funds, your client cannot “undo the sale”. In contrast, with a loan, the client can repay his/her advance at any time without penalty and take back the full value of the death benefit. In addition, your client may be eligible for additional funds under a life Insurance loan if his/her medical status changes.
- ALIGNMENT OF INTEREST – with a life settlement, the party purchasing the policy maximizes their profit the sooner that the individual dies. With an advance, the interest charged makes up a significant portion of revenue to the lender, even to a point that lies somewhat beyond life expectancy
The realities and expenses of an advanced illness often make continuing to hold on to a life insurance policy a luxury that can be replaced with a benefit. When policy premiums become a financial burden and the original reason for the policy is no longer a priority compared to other needs, then advising your clients to let go of their policy may be sound advice. Make sure that you understand the options available to your clients so that you can guide them to the decision that will offer them the greatest advantage. Let us know if we can help!