InsuranceNewsNet Magazine January 2011 : Page 26
TERM-TO-PERM, LIFE | FEATURE TITLE TO SETTLEMENT By Stephen E. Terrell CONVERSION PRIOR TO SETTLEMENT CAN SIGNIFICANTLY INCREASE YOUR CLIENT’S PAYOUT a cold retreat. Fortunately, confidence has returned and the Wall Street heavy-weights are back on the scene. A new crop of top-notch hedge funds, private equity groups and investment bankers are get-ting 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 com-ponent is critical. While most policyhold-ers 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 con-verting that term policy might be the only option for the policyholder to keep cover-age. However, not every conversion is exer-cised, so there are a large number of con-vertible 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 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 F or term life insurance holders, a relatively new option exists that enables them to secure value from a policy that might be nearing expiration. Converting a term policy to a permanent policy, such as a uni-versal 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. Term to perm transactions first hit the scene about two years ago, but life set-tlement 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 interest-ing 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 poli-cies and purchase them to include in life settlement portfolios. It is important to note that the life set-tlement industry is once again on a fast track, making these transactions viable. Earlier in the year, the market was suffer-ing from a crisis of confidence on many levels. Agents, brokers and consum-ers were still wary, and the capital mar-kets were just starting to emerge after 26 InsuranceNewsNet Magazine January 2011 fee on the conversion of the policy and the agent will always earn a fee on a life insurance settlement. Secondly, the set-tlement creates a liquidity event for the client, and 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 poli-cies 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 WHAT QUALIFIES FOR TERM-TO-PERM? • Policy must be convertible term with a minimum face value of $500,000. • Policyholder must be more than 70 years old. • Policy must be within the con-version period determined by the carrier. ADVANTAGES • Underwriting from existing pol-icy carries over to new, converted policy. • Cost of conversion is built into life settlements, so no out-of-pocket costs exist for policyholder. • “Found money.” DISADVANTAGES • A life settlement can reduce overall insurability. • Proceeds may be taxable.
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