In other words, the policies will die before the insureds!
Choices
While retirement income planning frequently targets funding only to 90 or 95, there are many opportunities along the way to adjust the plan based on the health of the individual as they age.
Retirement planners have many levers that can be pulled to adjust the plan, such as: working longer, saving more, lowering spending and investing more aggressively.
Additionally, some income sources like Social Security, pensions and life annuities continue regardless and represent some floor level of income no matter how long one lives.
An underfunded life insurance policy offers little flexibility in planning, while an overfunded policy offers a lot.
If an insured’s health deteriorates to such an extent that longevity is unlikely, the ongoing premium amount can be reduced accordingly.
But for an underfunded policy, when the realization hits that the policy is underfunded due to the insured’s good health and longevity, the additional premium required may well be unaffordable.
Additionally, if the policy is, in fact, no longer wanted or needed, the well-funded policy will likely have greater potential value on the life settlement market.
How much does it cost to fund a policy on a 50-year-old to age 100 rather than 90? Looking again at a competitive guaranteed universal life policy, the additional annual premium is only about 7.7% more, and the additional premium for a current assumption policy would only be about 5.2% more.
The difference seems like a bargain to gain all that flexibility years later when it could be badly needed.
While a life settlement is a great way to extract some salvage value from a policy about to be surrendered or lapsed, it should not be used as a crutch to validate underfunding a policy.
Instead, policies should be adequately funded, leaving the insured in the most flexible position possible — whether living, dying or selling.
As potential life settlement situations come up, remember, “It can’t hurt to try — it can only hurt not to!”
Credit: Andrii-Vodolazhskyi/Shutterstock
Robin S. Weinberger, CLU, ChFC, CLTC, is the director of national accounts for Life Insurance Settlements Inc. She has been a general agent and director of national accounts for Connecticut Mutual and vice president of marketing for Sun Life of Canada. She can be reached at [email protected] or (617) 451-3343.
Peter N. Katz, JD, CLU, ChFC, RICP, is a life settlement broker and co-director of national accounts with Life Insurance Settlements. He is also a consultant specializing in life insurance advanced sales illustrations, and he has served as an advanced markets attorney and in product development. He can be reached at [email protected] or (860) 937-2936.
