Seniors looking for an additional source of income should think twice about letting unwanted life insurance lapse, because these policies may be sold for substantial value to help fund a better quality of life in their retirement.
“We buy insurance for needs that we perceive will be there in the future and those needs may well change,” says Rick Robertson, an expert in finance and managerial accounting with Western University’s Ivey Business School in London, Ont.
A family might have taken out a policy when their son was 15 years old, for example, but that protection may no longer be needed when the parents are retired and he’s 35 years old and enjoying a successful career. Premiums can also become a significant financial burden and unaffordable.
Selling that contract to a life settlement company “is another way of getting value out of this policy,” Robertson says.
The life settlement market is established in Quebec, Saskatchewan, New Brunswick and Nova Scotia where the sale of policies is legal, but these transactions aren’t permitted in other provinces. There are some misconceptions about these products in the insurance community, but their legality is firmly established in the Quebec Civil Code. Critics of life settlements argue that these contracts could result in some seniors being exploited, or that they may not get fair value for their existing policies.
There is also a reluctance to discuss this type of transaction, in the same way some people are uncomfortable buying life insurance or investing in an annuity because these are associated with the end of life.
But experts say the unease people feel when thinking about death shouldn’t prevent them from making use of a valuable asset.
“This is a huge amount of money, and with aging populations throughout North America living longer and having more longevity risk, this seems like an asset that can be a great source of value for them to tap into,” says Lauren Cohen, a professor of finance at Harvard Business School.
“(It’s) a lack of awareness. People don’t understand this, and if you look at the incentives in the markets, insurance companies are not going to be highlighting this on their marketing materials because they have the good side of this deal.”
Darwin Bayston, president and chief executive officer of the Life Insurance Settlement Association in the United States, says the majority of seniors don’t know about the secondary market for life insurance. He notes that although selling a policy may not be the right decision for everyone, people should be aware it’s an option.
“Billions of dollars of face value of life insurance is actually surrendered back or lapsed by seniors, and most of those don’t have an understanding or awareness that they may be able to sell it if they choose to do so,” he says.
Some estimate close to 90 per cent of all policies purchased never result in a benefit payment. This amounts to billions of insurance every year. Policies being abandoned are allowed to lapse or are surrendered to the original life insurance company for a cash value before maturity. That value is typically substantially less than what a life settlement fund would pay, but both options come in below the policy’s total benefit if you continue to pay premiums and allow it to run its course.
Cohen believes people who wish to sell their policies are better off using the secondary market. Cashing the contract in with the original insurer, he says, is “like saying, if you want to sell your house, you have to sell it back to the bank who gave you the mortgage – and of course, they can decide whatever price they want to offer, and you have to take that price or take zero.” You can also insure your house to claim flood damage costs, if your house is damaged due to flood.
“That’s not the way that markets work, that’s not the way that assets get their fair value,” he said.
Ken Lester, a professor at McGill University’s Desautels Faculty of Management and CEO of Lester Asset Management Inc. in Montreal, says life settlements are a bit like reverse mortgages, which allow homeowners to take out a loan against the equity in their home to receive cash payments.
“For certain people it can be a very win-win kind of situation, where they don’t need the money on death, they need it very badly while they’re alive,” Lester says.
“Philosophically, I’m all for it. We only have one life to live and we should live it as comfortably as we possibly can.”
To Ivey’s Robertson, the most important consideration when weighing whether to sell a policy is whether people have — and understand —the information they need to make a decision. And he is clear in his view about restrictions against people having the choice to do so in some parts of Canada.
“I’m a big believer in providing people the freedom to do what’s right for them, as opposed to the government saying ‘I know better than you,’ because the government doesn’t know my situation,” he says.
“It’s like the government telling me I can’t sell shares I own in BCE. Why not? Maybe I’m not a wise investor, but they don’t tell me I can’t do that. This is just another one of the assets I happen to own.”
Originally published November 2014, compliments of the Montreal Gazette. This story was produced by Postmedia’s advertising department in collaboration with Perisen to promote awareness of this topic for commercial purposes.