Our Privacy Policy

Lorem ipsum dolor sit amet, per ut dicta constituto, tantas mucius ius ex. Te graeco mnesarchum vel, iusto dicunt mei ex.

Sea et malorum ornatus reprehendunt. Est facilis delicata at. Ut per appellantur consequuntur.

Subheading

Ei eos tamquam oblique laboramus, ea nullam suscipiantur eos, ei impedit apeirian persequeris vis. Eos labitur recusabo et. Illud inani everti in vel, graeci viderer imperdiet ne cum. Iisque ancillae an vix, ea ferri detracto offendit per, iriure suscipiantur signiferumque quo ut. Consequat repudiandae et per, mea at suas debet, ei malis liberavisse concludaturque per.

Id alii tamquam vel, vix alii docendi at. Ius labores assentior ex, dolor voluptua signiferumque pro ut. Blandit aliquando assueverit et vis, at cum affert vulputate. Meis sanctus scriptorem mel no, purto albucius cu nam. Ludus petentium in nec, te qui zril integre vivendum.

Meis sanctus scriptorem mel no, purto albucius cu nam.
Ludus petentium in nec, te qui zril integre vivendum.

Subheading

1. Lorem Ipsum

Ei eos tamquam oblique laboramus, ea nullam suscipiantur eos, ei impedit apeirian persequeris vis. Eos labitur recusabo et. Illud inani everti in vel, graeci viderer imperdiet ne cum. Iisque ancillae an vix, ea ferri detracto offendit per, iriure suscipiantur signiferumque quo ut. Consequat repudiandae et per, mea at suas debet, ei malis liberavisse concludaturque per.

Id alii tamquam vel, vix alii docendi at. Ius labores assentior ex, dolor voluptua signiferumque pro ut. Blandit aliquando assueverit et vis, at cum affert vulputate. Meis sanctus scriptorem mel no, purto albucius cu nam. Ludus petentium in nec, te qui zril integre vivendum.

2. Lorem Ipsum

Ei eos tamquam oblique laboramus, ea nullam suscipiantur eos, ei impedit apeirian persequeris vis. Eos labitur recusabo et. Illud inani everti in vel, graeci viderer imperdiet ne cum. Iisque ancillae an vix, ea ferri detracto offendit per, iriure suscipiantur signiferumque quo ut. Consequat repudiandae et per, mea at suas debet, ei malis liberavisse concludaturque per.

Id alii tamquam vel, vix alii docendi at. Ius labores assentior ex, dolor voluptua signiferumque pro ut. Blandit aliquando assueverit et vis, at cum affert vulputate. Meis sanctus scriptorem mel no, purto albucius cu nam. Ludus petentium in nec, te qui zril integre vivendum.

3. Lorem Ipsum

Ei eos tamquam oblique laboramus, ea nullam suscipiantur eos, ei impedit apeirian persequeris vis. Eos labitur recusabo et. Illud inani everti in vel, graeci viderer imperdiet ne cum. Iisque ancillae an vix, ea ferri detracto offendit per, iriure suscipiantur signiferumque quo ut. Consequat repudiandae et per, mea at suas debet, ei malis liberavisse concludaturque per.

Id alii tamquam vel, vix alii docendi at. Ius labores assentior ex, dolor voluptua signiferumque pro ut. Blandit aliquando assueverit et vis, at cum affert vulputate. Meis sanctus scriptorem mel no, purto albucius cu nam. Ludus petentium in nec, te qui zril integre vivendum.

Subheading

Ei eos tamquam oblique laboramus, ea nullam suscipiantur eos, ei impedit apeirian persequeris vis. Eos labitur recusabo et. Illud inani everti in vel, graeci viderer imperdiet ne cum. Iisque ancillae an vix, ea ferri detracto offendit per, iriure suscipiantur signiferumque quo ut. Consequat repudiandae et per, mea at suas debet, ei malis liberavisse concludaturque per.

  • Bullet style
  • Bullet style
  • Bullet style

Ei eos tamquam oblique laboramus, ea nullam suscipiantur eos, ei impedit apeirian persequeris vis. Eos labitur recusabo et. Illud inani everti in vel, graeci viderer imperdiet ne cum. Iisque ancillae an vix, ea ferri detracto offendit per, iriure suscipiantur signiferumque quo ut. Consequat repudiandae et per, mea at suas debet, ei malis liberavisse concludaturque per.

  1. Numbered list
  2. Numbered list
  3. Numbered list

Additional resources

Life Insurance Agents

Someday, history books will dedicate far too many pages describing the year of 2020. A pandemic-fueled economic crisis has caused many problems for U.S. households — but one outcome that will linger on for years is the damage done to Americans’ retirement plans. A study from The Commonwealth Fund estimates that, in 2020, 11% of workers aged 65 and older have lost their jobs. That’s 1.1 million people who likely have to overhaul their retirement outlook. Those who can’t replace their income may have no choice but to retire earlier than they’d planned, with a much lower savings balance than they’d like.

That presents an interesting challenge for financial advisors and planners. When your client faces an income shortfall just months or years away from reaching his or her retirement goals, what are the best options to course-correct? Downsizing is one, but it’s probably not the prospective retiree’s first choice. Another strategy is to get creative about liquidating non-investment assets to raise cash and shore up the savings balance. That’s where a life settlement can help.

What are life settlements?

A life settlement is the sale of a life insurance policy to a third-party investor for cash. At the close of the transaction, the investor owns the policy along with all rights to the death benefit. The investor is also responsible for any future premium payments. In return, the policyholder receives a lumpsum payment that can be used for any purpose, though a portion of the proceeds are normally taxable.

Are life settlements legal?

Life settlements are legal transactions nationwide. They’re also regulated in most U.S. states. The exceptions are Alabama, Michigan, Missouri, New Mexico, South Carolina, South Dakota, and Wyoming. Most regulated states enforce a waiting period before the policyholder can sell, though there may be exemptions available under certain circumstances such as illness, divorce, retirement, or disability. These states also typically require state approval of contracts, escrow agreements, and disclosures used throughout the life settlement process. That approval is intended to ensure transparency and protect policyholders from fraud — both of which are central themes in life settlement regulations.

What asset class are life insurance policies in?

Life insurance is its own asset class that falls under the umbrella of alternative assets. Characteristics that differentiate permanent and convertible life policies from other asset types include the tax treatment, low volatility, liquidity, streamlined wealth transfer, and versatility.

Tax treatment

The tax treatment of life insurance is very favorable to policyholders. For cash-value policies, investment savings grow without tax consequences. And, if the insured chooses to hold the policy until end-of-life, no taxes are incurred on the gain that naturally arises between cumulative premium payments and the amount of the death benefit. Life insurance gains only become taxable when the policyholder benefits from them during his or her lifetime. That happens when the policyholder pulls out more cash than was paid in total premiums, such as in a surrender or a life settlement.

Low volatility

Life insurance is not as volatile as equity assets and can have a low correlation to the financial markets. The rate of return on whole life insurance, for example, is guaranteed. Other forms of life insurance, such as variable life, do allow the policyholder to invest in sub-accounts that are tied to the financial markets. These policies can be structured so that only the cash value growth, but not the death benefit is affected by market fluctuations.

Liquidity

New life insurance policies are not liquid, though they do gain liquidity as the cash value grows over time. Once the policy has accumulated cash value, policyholders can access that cash very quickly, either through a direct withdrawal or a low-rate loan. Those policyholders who no longer want or need the insurance can also liquidate their asset by surrendering the policy or selling it in a life settlement.

Simple wealth transfer

Life insurance shines as a straightforward strategy for leaving money to heirs. Named beneficiaries receive the death benefit in cash without probate and without tax consequences.

Versatility

Life insurance can be extremely versatile. Its cash value grows without tax consequences and can later be used to supplement one’s retirement income. Or, if cash is not needed from the policy, it can be left alone until the named beneficiaries receive their tax-free death benefit. No other asset type offers that combination of liquidity, tax-free earnings growth, and simple wealth transfer.

Why are life settlements beneficial for your clients?

A life settlement is often the most fruitful method to liquidate life insurance, since life settlement investors normally pay more than the policy’s surrender value. In some cases, policyholders can get as much as 60% of the policy’s face value. The extra cash could solve a retirement savings shortfall, without requiring a lifestyle downgrade or a reverse mortgage.

What types of life insurance policies qualify for a life settlement?

Individual and group universal life, variable life, whole life, and convertible term life policies normally qualify for life settlements. Non-convertible term life is sometimes sellable, depending on the status of the level-term period and the health of the insured.

What is your role as a financial advisor?

Fiduciary duty is the legal responsibility to act in the best interests of your client. In practice, that usually involves being transparent about how you get paid, avoiding conflicts of interest, and making personalized, objective recommendations to clients based on their situation, goals, and risk tolerance. Those principles apply whether you’re a CPA, tax advisor, estate attorney, financial planner, or retirement advisor. In any one of those roles, you might be the one fielding the client’s question about how to improve liquidity. If the client has life insurance, a life settlement may be an option to explore. If your client is interested in selling their life insurance, you’ll want to make sure you’re getting the highest value for their policy. Harbor Life helps get you the highest possible offer through its partnership with Harbor Life Brokerage, which utilizes an online life settlement auction platform that puts your client’s policy in front of the nation’s top providers. By putting the policy in front of more providers, you’ll get more offers which will drive up the value.

How to talk with clients about life settlements?

You can start the life settlement conversation with clients by taking inventory of their existing life insurance policies. Review the beneficiaries, death benefits, and premiums. Revisit your client’s goals with respect to end-of-life wealth transfer and your client’s willingness and ability to continue making premium payments. If your analysis uncovers redundancies or unnecessary coverages, it could be time to discuss options for liquidating or eliminating some of those policies.

The options including lapsing, surrendering, or selling the unwanted life insurance. Letting a policy lapse wouldn’t normally provide any cash proceeds, though it would keep the policy in force for a longer period of time. The policyholder would simply stop making premium payments. The insurance company would use any accumulated cash value to fund those payments going forward, until the cash runs out. There is a grace period, but the insurer will eventually cancel the insurance if no payment is made.

Surrendering the policy cancels the coverage immediately. The insurer pays the policyholder any accumulated cash value, less surrender fees. Surrender fees can be very high if the policy is only a few years old. Any gains recognized as a result of the surrender payment would normally be taxable.

Selling the policy in a life settlement usually results in higher cash proceeds for the policyholder, but the process can take two to four months to complete. As with a surrender, gains on the policy are usually taxable.

How do life settlements benefit financial advisors?

As a financial advisor, you build trust by objectively educating your clients about all of their options. For the client who has excess life insurance and a savings shortfall, the life settlement may be one of the least intrusive solutions. Prospective retirees who’re worried about losing a home, running out of money, or being forced into a lifestyle downgrade should appreciate the guidance. Whether or not they ultimately decide to pursue a life settlement, they should understand that it’s an option — especially if they’ve already considered surrendering or lapsing the insurance policy.

Also know that the life settlement industry continues to grow and mature. With that growth comes greater regulatory protections, not only for sellers and buyers, but also for advisors. That is a welcome change, as it helps legitimize these transactions which can be so beneficial to seniors who are facing cash shortfalls.

Financial Advisors: How to Talk to Clients About a Life Settlement Option

Someday, history books will dedicate far too many pages describing the year of 2020. A pandemic-fueled economic crisis…

Read More
Broker-Dealers

Retirement is more expensive than it used to be. Seniors today live longer and spend more on healthcare than any other generation. Today’s seniors are also largely underfunded. A 2020 TD Ameritrade report concludes that 33% of seniors aged 70 to 79 have less than $100,000 in their savings. Those aged 60 to 69 are even worse off, with 38% having less than $100,000 saved. In that context, the life settlements may be an increasingly popular solution to help cash-strapped seniors.  A life settlement is the sale of a life insurance policy to a third-party investor for cash.

Life settlements have become more popular in recent years, even as false or misleading information about them circulates among broker-dealers and insurance policyholders. There are a few factors driving the spread of misinformation. For one, the life settlement industry is fairly young. And while these transactions are regulated in most states, the exact regulations can vary from state to state. Secondly, life insurance companies have shown resistance to the ongoing growth of the life settlement industry. While there is a perspective that life settlements actually benefits insurer by making their product more valuable, not everyone sees it this way. The opposing view is that insurers profit more on a surrendered policy than on a life settlement.

The rumors, misinformation, and myths about life settlements won’t prevent the industry from growing. But they could financially harm seniors. Would-be policy sellers, for example, may hold off on a life settlement because they’re confused about how it would work. Or, worse, they may disregard their life insurance as a source of cash because they’ve heard “facts” that are simply untrue.

If you are a senior who’s interested in liquidating your life insurance, you should know the real truth about life settlements. That’s the only way you can make an informed decision on whether a life settlement is right for you. A good first step is to review our breakdown of the five most common life settlement myths below. If you’ve ever discussed life settlements with a broker dealer, you’ve may have heard one of two already.

Myth #1: Life settlements are not legal or regulated

Fact: Life settlements are both legal and regulated. The legality of selling life insurance was established in the early 20th-century when the Supreme Court ruled on Grigsby v. Russell. Grigsby was a physician who purchased a life insurance policy from his patient, John C. Burchard. Burchard needed an operation but didn’t have the funds to pay for it. He offered to sell Grigsby his life insurance as payment. Grigsby paid Burchard $100, performed the operation, and then assumed responsibility for the policy’s premium payments.

Later, after Burchard had passed, the executor of Burchard’s estate disputed the transaction, arguing that the death benefit should have been paid to Burchard’s estate and not to Grigsby. The Supreme Court ruled squarely in favor of Grigsby, stating that life insurance is an asset and, therefore, can be legally sold to another party.

Today, life settlements are regulated in 43 states. Those regulations commonly cover disclosures, accepted business and advertising practices, licensing of settlement providers and brokers, and life settlement contract language. These statutes are largely designed to protect policyholders, agents, brokers, and insurance companies from fraud.

Myth #2: Life settlements are only for terminally ill individuals

Fact: You do not need to be terminally or chronically ill to sell your life insurance in a life settlement. The primary requirements for a life settlement are that you are at least 70 years old and your policy is valued at $50,000 or more.

The broker-dealer who says you have to be terminally ill to sell your insurance is likely confusing the life settlement with a viatical settlement. While life settlements and viatical settlements are similar, there are some important distinctions between these two transactions. For one, viatical settlements close much more quickly than life settlements. A life settlement might take one to three months to complete, while the viatical settlement process only takes a few weeks. These are expedited because the policyholders generally needs the funds right away.

Taxation rules for viatical settlements vs. life settlements differ as well. Viatical settlement proceeds are usually not taxable, while a portion of life settlement proceeds can be taxable.

Myth #3: There are rules on how people can spend money from a life settlement

Fact: There are no rules on how you spend the proceeds from a life settlement. The money is yours to use as you wish. You could, for example:

  1. Pay down debt. If your debt is strangling your fixed-income budget, use your life settlement proceeds to pay off credit card debts or even a mortgage.
  2. Pay for healthcare, nursing home care, etc. Many seniors are motivated to sell their life insurance to free up cash for healthcare and related services.
  3. Fund your living expenses. Even if debt isn’t a problem, an influx of cash can help with daily living expenses over time.
  4. Create an emergency fund. A healthy emergency fund allows seniors to manage through unexpected expenses without increasing their retirement distributions. The challenge many seniors face, however, is refunding cash savings once it has to be used for something. A life settlement could easily solve that issue.
  5. Invest the proceeds for dividend income. Life settlement proceeds can also be invested for future dividend income.
  6. Spend the money on vacations or upgrade your lifestyle. Yes, you can use your life settlement proceeds to take a trip around the world or to buy an RV.

Myth #4: People can get more money by surrendering their policy

This may be the most damaging life settlement myth of all. Unfortunately, too many broker dealers repeat this myth — either because they believe it or because they don’t want you to know that the opposite is true.

Fact: Life settlements generate more cash than life insurance surrenders. In fact, you may be able to get up to 60% of your death benefit by way of a life settlement. This makes sense; the only reason the life settlement industry exists is because investors are willing to pay more than surrender value for your life insurance. Few policyholders would logically choose a life settlement if a surrender was more lucrative.

You can also debunk this myth yourself. Contact your life insurance company and ask what your policy’s current surrender value is — without committing to anything. Then, contact Harbor Life Settlements and get a free, no-obligation estimate on your policy’s market value. Compare the two numbers and decide for yourself.

Myth #5: You have to be a life insurance expert to offer life settlements to clients

Many financial and legal advisors today just aren’t that familiar with life settlements. Because they lack experience with and exposure to these transactions, they may feel uncomfortable discussing them with clients. The real truth is that your advisor doesn’t have to be an expert in life settlements. His or her knowledge can be limited to the understanding that life insurance can be sold to a third-party for more than the policy’s cash surrender value. The advisor who masters that concept can easily recognize when it might be time to mention life settlements, such as:

  • When a client wants to surrender a policy
  • When a client needs cash, but doesn’t have other sellable assets
  • When a client no longer wants to pay life insurance premiums

Advisors who don’t feel comfortable explaining life settlements to a client can easily loop in the Harbor Life Settlements team to lead that discussion. Harbor Life Settlements can also provide a free, no-obligation estimate for the policy’s value — information the client would need before deciding if a life settlement is the right move anyway.

If you or a client has a life insurance policy that’s no longer needed, choose to deal in facts instead of myths. Contact our team today to find out what that policy is really worth.


5 Life Settlement Myths From Your Broker Dealer

Retirement is more expensive than it used to be. Seniors today live longer and spend more on healthcare…

Read More
Life Insurance

Life insurance is a long-term asset. Over the decades a life insurance policy is in force, your client’s financial situation is likely to evolve. Sometimes, that evolution is so significant that the existing life coverage is no longer a good fit.

When that happens, your client will look to you for a recommendation on how to optimize their coverage cost effectively. One option to discuss is the 1035 exchange. To prep for those conversations, here’s a closer look at how 1035 exchanges work, their advantages and disadvantages, and alternative strategies to consider. 

What is a 1035 exchange on a life insurance policy? 

A 1035 exchange is a tax-free method for replacing an existing life insurance policy.  The number 1035 refers to the section of the tax code that defines and allows for this transaction. 

How 1035 exchanges work 

Typically, cashing out a life insurance policy is taxable if the proceeds are more than the client’s cost basis. Any tax liability, of course, lowers the client’s budget for new coverage. The 1035 exchange waives the normal tax consequences, but under strict guidelines. A few 1035 exchange rules are:  

  • The owner and the insured on the new policy must match the owner and insured on the old policy.
  • The policyowner cannot take possession of the proceeds from the old policy — the life insurer(s) must handle the transfer. 
  • If the old contract is life insurance, the new contract must also be life insurance. This is important to point out because Section 1035 exchanges can also be used for annuities. In that case, the exchange must be from one annuity to another annuity — not from life insurance to annuity or vice versa. 

For the client who does qualify for the exchange, any gain in the old insurance policy gets transferred to the new policy. If the client later cashes out the new policy, there may be tax consequences.

Who needs a 1035 exchange?

A section 1035 exchange is for the life insurance policyowner who wants to update coverage but has a taxable gain in an existing policy. If the client’s surrender value of the existing policy doesn’t exceed the total premium payments, there’s no taxable gain. In that case, a 1035 exchange isn’t needed.

Pros and cons of 1035 exchanges 

Pros

The primary advantage of doing a 1035 exchange is the tax deferral. Your client can secure a policy with more favorable terms, without incurring a big tax bill. 

Cons

A tax deferral on a sizable gain can be a huge advantage — but it doesn’t always outweigh the disadvantages of a 1035 exchange on life insurance. Potentially negative outcomes to consider include: 

  • Less efficient insurance premiums on the new policy due to age or health. An older life insurance policy, priced when your client was younger and healthier, is likely to have lower premiums. A new policy will consider your client’s current age, health, and lifespan (which dictates how many premium payments will be made going forward).
  • Surrender charges could reduce proceeds on the old policy. Surrender fees can be very high in the early years of the policy. Older policies may have low or no surrender fees.
  • First-year policy expenses, such as commissions, may consume the cash value in the old policy. Fees on a new policy can reduce the efficiency of the 1035 exchange.
  • 1035 exchanges get more complicated if there is an outstanding policy loan. Completing a 1035 exchange on a policy with an outstanding loan is called a loan rescue. Not all insurance carriers do loan rescues. If a client does a 1035 exchange and the policy loan isn’t transferred in full, the unpaid balance is probably taxable.

    Your client may want to pay down the loan prior to the exchange to avoid those complications. Alternatively, the client could reduce the size of the policy to offset the loan the balance. This strategy should be handled carefully, however. The IRS may view the policy reduction and the exchange as a single transaction, even if they happen in two separate steps. In that case, the loan balance may still be taxable. To avoid that outcome, several months should separate the reduction and the exchange.    

Alternatives to a 1035 exchange 

Based on your client’s situation, the 1035 exchange may not be the ideal solution. Fortunately, there are other ways for policyholders to upgrade or modify their insurance coverage. Three alternatives are a life settlement, purchasing a new policy and keeping the old one, or surrendering and replacing the life insurance outside of a 1035 exchange.  

1. Life settlement 

A life settlement is the sale of life insurance to a third-party for a lump sum of cash. Policyholders who are 65 or older usually qualify, as long as the policy is valued at $50,000 or more. 

The life settlement is not a tax-free transaction. The portion of life settlement proceeds that represents a gain is usually taxable. 

Still, the life settlement can be an attractive alternative to a 1035 exchange. This is because the sale price will be much higher than the policy’s surrender value. Often, life insurance will sell for two to four times more than its surrender value, or up to 60% of the death benefit. Net of taxes, that may leave your client with more cash to spend on new coverage. 

If the net cash proceeds are more than what’s needed to buy replacement coverage, your client can spend or save the extra cash. There are no restrictions on how those proceeds are used.

Also, since there’s no tax deferral on a life settlement, any new coverage the client purchases won’t inherit the taxable gain from the old policy.

2. Purchase additional insurance 

The client who needs additional life insurance could also purchase supplemental coverage and keep the old policy in force. This can be more cost-efficient than exchanging a smaller policy for a larger one. 

If the new premiums are higher because the policyowner is older, for example, it makes sense to keep the existing policy. That way, the higher premiums only apply to a portion of the client’s overall coverage. 

3. Surrender and replace without a 1035 exchange 

When there’s no taxable gain hiding in the client’s existing life insurance, there’s no need to do a 1035 transfer. The client instead could surrender the old policy and buy a new one, with no tax consequences. 

Before moving forward on this strategy, compare the potential after-tax proceeds from a life settlement to the existing policy’s surrender value. If the life settlement is more lucrative — and often, it is — then a surrender probably isn’t the right option. 

You can learn more about the pros and cons of life settlements at HarborLifeSettlements.com. Our team offers free life insurance appraisals. The value of your client’s life insurance on the secondary market is a key consideration when evaluating a 1035 exchange. If the client can come away with more cash through a life settlement, your client may prefer that strategy over a 1035 exchange. 

Reach out to Harbor Life Settlements today to learn more.

Financial Advisors: Should You Use a 1035 Exchange to Optimize Life Insurance?

Life insurance is a long-term asset. Over the decades a life insurance policy is in force, your client’s…

Read More