Financial advisors spend a great deal of time studying market trends and learning about the best ways to manage money for their clients: understanding stock market history, teaching the magic of compounding, and explain the present value of money, among many others. I applaud them for their diligence in helping people save money for retirement and making sound, long-term plans. But when I speak to financial advisors and ask them to identify the biggest financial mistake a senior can make, almost every one of them gets the wrong answer. Yes, we want people to start early. Yes, you need to re-balance your portfolio. Yes, take less risk as you age. But the single biggest mistake that a senior can make is letting a life insurance policy lapse.
Each year, millions, perhaps even billions of dollars in life insurance policies lapse in the United States. Term, whole life, universal – you name it. All types of policies lapse, and seniors are throwing away money. They might as well stand in their backyard and burn $100 bills.
Now this phenomenon is no accident. Life insurance companies structure their products in ways that encourage seniors to let policies lapse. They write term policies, for instance, that expire before they are typically needed. They also create products with escalating premium costs, which end up becoming unscalable financial mountains to seniors. In general, insurance companies make it difficult to keep insurance and they “encourage” clients to let policies lapse. This is a huge error which financial advisors need to prevent.
Clients that are considering letting a policy lapse need to understand that they have many options.
Accelerated death benefits. Clients having issues affording their premiums because of an illness may be eligible for accelerated death benefits. Terminally ill policyholders, in particular, can get cash advances against the death benefit and receive a payout before they pass away. This option could be a godsend for clients facing medical catastrophes.
Assignment of the policy as a gift. A policyholder can give away ownership of a life insurance policy to a third party, such as a child or other beneficiary. The new owner is responsible for the premium payments, but in the right situation, it enables the family of an insured to keep a policy in force that could pay a death benefit in the future. Before letting a policy lapse, let your clients know that it might make sense for them to assign the policy as a gift to a child or children.
Life insurance settlement. Seniors can sell their insurance policy and receive a cash payout in excess of the cash surrender value through a life settlement. How much they receive will depend on the results of their policy appraisal, but most seniors over age 70 will get more cash from a life settlement than simply surrendering a whole life policy. A policy appraisal will best analyze this option.
Term to perm to life settlement. Term insurance policyholders can convert the policy to whole life and then perform a life settlement. Agents can guide their clients through the process and convert a policy without them having to undergo a medical exam. Expiring term policies are more valuable than ever if converted and then analyzed with a life insurance policy appraisal.
Clients who perform a life settlement can use the proceeds for whatever they like but a sound move is to “replace” the policy with another form of coverage, like long-term care insurance. This can be a “win-win-win” scenario for financial advisors.
First, you're providing a great service for your client because you're offering “found money” and probably solving a financial problem. Second, the advisor can earn a commission on a life settlement.
And third, the financial professional can also earn a commission on the client’s purchase of new coverage.
As we begin the new year, we know that times are tough. We have to make sure that our clients understand that a life insurance policy is an asset and not something that you just let lapse. Life insurance, whether it is a term or permanent, is an asset that can be leveraged. Agents and advisors who understand these options can offer a great service to their clients and earn favorable commissions. It all starts with a policy appraisal and analysis.