For term life insurance holders, a relatively new option exists that enables them to unlock and secure value from a policy that might be nearing expiration. Converting a term policy to a permanent policy, such as a universal or whole-life policy, so that it can be immediately sold through a life settlement is a new retirement tactic that is growing in popularity. “Term to perm” transactions can provide immediate cash to policyholders from a formerly non-performing asset while offering new opportunities for agents. These transactions can fill a need within retirement planning and offer yet another reason why allowing an insurance policy of any type to lapse can be a major financial error. Seniors and boomers are facing many unforeseen challenges, and term-to-perm conversions combined with a life insurance settlement offer a unique way to meet the financial needs of the new retirement paradigm given longer life expectancy.
Term to perm transactions first hit the scene about two years ago, but life settlement provider companies have seen an increase in volume over the past 12 months as the financial crisis continues to batter seniors and boomers. What makes term-to-perm so interesting and attractive is that one can turn a non-performing asset into a money-maker with very little downside. Life settlement providers work with agents to convert policies and purchase them to include in life settlement portfolios. It is important to note that the life settlement industry is once again on a fast track, making these transactions viable. Earlier in the year, the market was suffering from a crisis of confidence on many levels. Agents, brokers and consumers were still wary, and the capital markets were just starting to emerge after a cold retreat. Fortunately, confidence has returned and the Wall Street heavyweights are back on the scene. A new crop of top-notch hedge funds, private equity groups and investment bankers are getting more and more involved.
For agents and brokers, these new funding sources are helping revive a practice area and profit center that had been dormant. As the industry embraces transparency and new best practices, confidence will continue to rise, and the industry will once again flourish. This new, robust market makes term-to-perm transactions possible. As with most insurance products, the education component is critical. While most policyholders understand the difference between term and whole or universal life, many don’t know the extra value that is offered by convertible term.
Most, though not all, term policies are convertible. Agents typically advise term insurance buyers to pay a slightly higher premium so that a policy can be converted in the future. This is normally suggested because agents want to make sure that their clients remain insurable. If a term policyholder gets sick and is not eligible for a new, permanent policy, then converting that term policy might be the only option for the policyholder to keep coverage. However, not every conversion is exercised, so there are a large number of convertible term policies in force, and many are due to expire in the next few years. A term to perm conversion could be a great windfall for policyholders and their agents.
For agents, term-to-perm can be a major win-win. First of all, because most insureds don’t know about the term to perm so the agent can help create a new, performing asset and essentially lead their client to “found money.” In many instances, the agent can earn a fee on the conversion of the policy and the agent will always earn a fee on a life insurance settlement. Secondly, the settlement creates a liquidity event for the client, so the agent may be able to advise the client to use the proceeds for another insurance product, such as long-term care insurance.
Agents should review the term policies of any clients older than 70. Just as when advising a client about a life settlement, agents should review why the policyholder purchased the policy in the first place. Because these needs often change. Are the beneficiaries grown, children? Or, perhaps the policy was purchased for the protection of a spouse who is now deceased. There are many common scenarios in which a life settlement is beneficial to a client.
Because term insurance is less expensive than permanent insurance, the policyholder may be holding with the intention of letting it lapse. It was purchased for a specific time frame, and they realize that the safety net is no longer needed once the term expires. What they don’t know is that the option exists to do a term to perm transaction. It frequently makes more sense than letting the policy lapse. If an insured has more than one term policy, it may be advisable to have them convert one policy for a settlement while keeping the other term policy to ensure long-term insurability and beneficiary protection.
Here’s an actual example of how a term-to-perm transaction helped a term policyholder:
A 72-year-old male with a $1 million, 20-year, convertible term policy was determining his options. The term was about to end, and the policy would be worthless if he didn’t renew or convert it. The annual premiums to renew increased dramatically- from $5,900 per year to $59,000 per year-making renewing untenable. His agent suggested converting the policy to permanent insurance and then performing a life settlement.
The agent created a cost illustration that listed the expenses associated with the policy conversion, while the life settlement provider computed a potential settlement offer (contingent on the conversion). The insured fronted the conversion premium and the settlement company purchased the newly converted policy from the senior. After the initial premium was paid, the transaction netted the policyholder more than $42,000.
The agent turned a non-performing asset into a net gain for the client and earned a fee on the conversion and on the life settlement. In addition, his client happily referred him to other prospects. Of note for this and some other cases was a condition in the policy that it couldn’t be converted after age 75. The value of term-to-perm reinforces the notion that life insurance is playing an increasing role in retirement planning. Today, term insurance, as well as permanent insurance, can be sold within the life insurance settlement marketplace. This further illustrates why it is important to keep all policies in force, even during tough economic times. The new retirement paradigm can be a challenge for seniors, but term-to-perm and life settlements offer solid solutions. While term-to-perm may not be an option for every term policyholder, it is certainly worth investigating. It offers agents yet another opportunity to discuss long-term needs with their clients and can lead to transactions that benefit all parties involved.