Retirees at Greater Risk of Lapsing Life Insurance as Inflation Continues to Spiral
As rising inflation continues to erode purchasing power and as retired seniors look for ways to reduce their expenses, life insurance policies may be on the chopping block and at greater risk of lapsing.
For more than 200 years, owning life insurance has provided financial protection for families against the risk of premature death, disability, and insufficient retirement income. Recently, the COVID pandemic spurred a significant boost in the number of families purchasing life insurance. Today, the total financial protection provided by in force life insurance policies in the U. S. is estimated at approximately $20 trillion.
Unfortunately, only a fraction of today’s in-force policies will ever pay a death claim in the future because a large percentage of policies will be allowed to lapse.
What many senior consumers may not know is that there is an alternative to lapsing policies that have become too expensive to maintain. Selling an at-risk policy in the secondary market can help seniors salvage their insurance investment and can often provide an unexpected cash windfall for their retirement.
Insurance and financial professionals should look for red flags and caution senior clients who are struggling to realign their income and expenses. Advisors will want to brush up on alternatives to lapsing a policy, including the client’s eligibility for a life settlement.
What the Numbers Show
Over the years, payouts to families for life insurance death benefits, income payments from annuities and disability income payments have made a significant social and economic impact on the U. S. economy. But the reality is, most life insurance policies sold to consumers never pay a death claim.
Many consumers who purchase policies fail to take into account unforeseen economic hardship that may impede their ability to afford the premiums in the future. As a consequence, most policies lapse or are surrendered back to the carrier and the money the policy owner had invested in annual premiums is gone forever.
The following statistics illustrate the enormity of the economic loss when policies are permitted to lapse:
- 70% of U. S. families own life insurance. (LIMRA 2014)
- In 2011 alone, over $101 billion in premiums were paid by households for individual life insurance policies. (ACLI)
- 31% of consumers plan to purchase new life insurance as a result of the COVID pandemic. (LIMRA 2021)
- 88% of universal life policies and 85% of term policies fail to pay a death benefit because they are allowed to lapse or are surrendered. (Milliam USA 2004)
- For policies sold to seniors at age 65, 76% of universal life policies and 74% of term policies never pay a claim. (Milliam USA 2004)
- According to a study involving one specific insurance carrier, lapse rates for policies issued by the company had nearly doubled during the economic recessions of 2000 and 2009 (Wharton, 2016-18)
Why a Life Settlement Makes Sense
For more than 20 years, life settlements have been providing policy owners with a smart and sensible exit strategy from unwanted life insurance policies that have become a financial burden to maintain.
When seniors over the age of 65 sell an unwanted life insurance policy in the secondary market, the transaction is known as a “life settlement.” Most life insurance policies may qualify, including term policies if convertible.
As the U. S. population continues to age, greater numbers of seniors over the age of 65 are discovering life settlements. Smart baby boomers and their elderly parents realize that monetizing the value of an unwanted life insurance policy is simply a prudent financial decision, especially when considering the alternative is lapsing or surrendering the policy for pennies on the dollar.
During a life settlement transaction, the policy owner transfers ownership of the policy to an institutional investor and receives a cash payment that far exceeds the policy’s cash surrender value, but is less than its net death benefit. The payout from a life settlement generally averages three to four times the policy’s cash surrender value. In some cases, the cash proceeds can reach as high as 60-80% of the policy’s face value. The investor who purchased the policy continues to make the annual premium payments and collects the death benefit when the insured passes away.
The financial benefit to the senior consumer for selling a policy versus letting it lapse is undeniable. Clearly it is in the policy owner’s “best interests” to at least explore the option.
Opportunity for Insurance Advisors
The current economic climate presents an opportunity for insurance professionals to take a leading role in helping senior clients make informed decisions regarding life insurance policies that may be at risk of lapsing.
Reach out to other professionals in your referral network (e.g. financial planners, CPAs, estate attorneys, etc.) and offer to provide your professional expertise regarding the growing life settlement market and the monetization of life insurance policies that have become marginally beneficial to clients.
Consider sharing with your older clients and professional referral sources our collection of life settlement success stories that clearly illustrate the financial advantages of selling excess or unwanted life insurance coverage – especially policies that are on the verge of lapse or surrender.