Using a Life Settlement Along With a SPIA to Provide Lifetime Income

By Steve Shorrock, ChFC, CLTC, FLMI

I have written in past columns of the many uses of a life settlement, which is the sale of unwanted, un needed or underperforming life insurance policies. The need for life insurance changes as in sureds mature. Life settlements are an extension of the life insurance industry and offer a potential option for insureds going through these changes.

One opportunity we have not discussed is the ability for an insured to turn a life insurance policy into a stream of lifetime income. Due to the increase in life expectancy, a concern of many seniors is outliving their assets and being a financial burden on their children. Whereas retirement assets may have thought to have been sufficient, now because of lower interest rates, unstable equity markets and the possible health change of a spouse, this nest egg may no longer be sufficient.

With a life settlement, there is opportunity for the owner to sell a life insurance policy for proceeds often much greater than the Cash Surrender Value. Since 2007, our clients have received more than $20 million in excess of the policies’ Cash Surrender Value. Instead of investing these net proceeds into vehicles that are either at historically low interest rates or in an unstable stock market, a SPIA (Single Premium Immediate Annuity) can be purchased that provides for lifetime income. As the life insurance policy was needed for income replacement or to protect against early death, now that same life insurance policy can fund lifetime income on a very efficient tax basis.

The chart below shows a real life example of the SPIA opportunity: A female client, age 82, with a life expectancy of 106 months, sold her $1 million Universal Life policy and received $250,000 of proceeds. Her financial representative suggested she purchase a SPIA, which would provide $2,380 of income each month for a minimum of 106 months and continue to pay for lifetime if she lives past life expectancy. Of this monthly income, 75% is tax-free as it is a return of basis or principal. A nice win for her!

Advisors who do not offer life settlements to their senior clients are not properly representing them. Clearly, you have the fiduciary responsibility to discuss life settlements within your clients’ financial plan.

FA

Steve Shorrock is President of LifeVentures Corp, which designs new life insurance products and develops marketing concepts for agents, and Co-Managing Director of Select Life Settlement Corporation, a life settlement firm that brokers seniors’ unwanted or unneeded life insurance policies. You can reach him at his Northport, Long Island office at 631-239-6655 or steve@lifeventurescorp.com