Last week, I was contacted by an agent with whom I’ve had a long relationship regarding a question from a client. The client is a gentleman who’s the surviving insured on a $1 million second-to-die policy, and he’s very old. His policy has little cash value, and it may or may not last as long as he will without throwing a lot more money into it. In fact, next year the policy has no cash value, and it’ll lapse in 4 years.
What initiated the call was something the client received from the carrier. It was an “Enhanced Cash Surrender Value” opportunity. The bottom line is that the insurance carrier is offering the policyowner a chance to surrender the contract for more money than the cash surrender value and, in this case, more than the gross policy cash value.
There’s absolutely nothing untoward about this offer. The same company has offered clients an opportunity to exchange into different policies with significantly higher death benefits for no additional money and greater guarantees. Of course, the first thing to cross any reasonable person’s mind is “Why?”
Clearly, it’s in the insurance company’s best interest to get the existing policy off the books by cashing it out or into another contract. Crediting rates, calculated liability, reserving requirements and who knows what else is going into the formula, but if the company can entice favorable activity to its balance sheet, it’s the company’s prerogative to make such offers as long as people aren’t tricked in any way. I was reasonably impressed with the letter sent to the agent of record giving a heads-up regarding what some clients would be receiving, and it made clear a policyholder didn’t need to do anything.
In this case, the enhanced offer was meaningfully greater than policy values: about three and a half times cash value and over five times the surrender value. If the client was thinking about bailing anyway, this would be a welcome opportunity for free money.
A Closer Look
Seeing that this client isn’t willing to put more money into his contract, and it will likely lapse before he will, I would be surprised if he didn’t take advantage of it. But wait! Let’s look a little closer at the company letter.
The letter is being sent to Survivorship Universal Life policyowners whose financial goals or needs may have changed due to the continually evolving economic and tax environments (including estate tax revisions), or a new focus on liquidity, retirement or long-term care needs. Life changes. Is their policy still a good fit?
Where might you have seen that verbiage before? Hint: It's virtually word-for-word out of a life settlement advertisement. So, the question now changes from “Should I take the enhanced offer?” to “Should I evaluate the life settlement market and compare that to the enhanced offer?”
Answer: Of course! In fact, without getting into details, this policy is about as close to a slam dunk life settlement as one is ever going to get, likely garnering an offer meaningfully in excess of the enhanced cash value offer.
The Best Exit Strategy
This is a good reminder that many, many policies out there are candidates for life settlements and may offer very advantageous opportunities for your clients. Taking it from the insurance company directly when some policyholders’ financial needs may have changed or maybe their policy is simply in its death throes, then a life settlement is the best exit strategy.
Bill Boersma is a CLU, AEP and LIC. More information can be found at www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com or email [email protected]