Life Settlements – The Other Side of the Coin – Episode 142

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[00:01] Welcome to the prosperity podcast fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street Here’s your host best-selling author Kim DH Butler and no BS money guy Todd Strobel Everybody welcome to another edition of the prosperity podcast. This is no BS money guy Todd Strobel Once again, we have our best-selling financial author and co-host Kim Butler with us today and today We’re going to be talking about life settlements the other side of the coin we recently had one of our diligent listeners ask what I think is a Fantastic question and Kim if you would I just want to kind of let you take it and and and explain What he was referring to and what his question was?

[00:53] Absolutely, we’re always so great for for listeners questions This was prompted by a study that we put out that was a 2010 survey by the US Government Accountability office that said When life insurance policy owners enter into a life settlement, so this is the seller They receive an average of seven times the amount of the policies cash value again based on analysis of this 2010 survey by the US government and just to back that up There was a 2014 study done by the London Business School that found that Americans so London Business School, but for Americans That sold their unwanted life insurance policies collectively received more than four times the amount They would have received had they surrendered them to their life insurance company. So four to seven times the cash value

[01:48] That’s the statement that these studies are making and is there an age group we’re referring to No, but we know from our own work that typically these are people in their mid 80s Most life settlements are buying policies where the insured is in their mid 80s Sometimes you’ll hit a late 70s or early 90s person, but typically it’s that 85 to 87 year old sweet spot Got it. And if you would just for our listeners our listeners clarify the difference between a life settlement in a viaduct Absolutely, so a viaductal is when somebody has less than two years to live could be of any aged person less than two years to live and a senior life settlement is often what they’re called is typically age like I said age 85 give or take and

[02:41] The specific time frame for their life expectancy is two to seven years So it must be greater than two to be called the life settlement Less than two is called a viaductal and then the funds that we’re aware of are cutting off the life Expectancy in the seventh year. In other words, these are not people expected to live 10 to 15 years These are people that expected to live two to seven years Super continue. So the question came in How is it possible that a life settlement company could possibly afford? afford to pay four to seven times cash value and this is from a person that like a lot of our listeners has learned about high cash value whole life insurance and What the listener needs to know is that life settlements are typically bought on?

[03:39] low cash value Universal life insurance and there is a world of difference between those two products So I just want to explain briefly before we answer this question and that is that a high cash value whole life product Typically will endow and what that means is either at age 100 or at age 121 depending on the age of the policy when it was bought in other words before 2008 I believe policies endowed at age 100 and 2008 and greater policies endowed at age 121, but the point is that endowment means that the cash value equals the death benefit and In our example from earlier 51 year old person was buying a $100,000 policy By the time they were a hundred and twenty one that death benefit was three or

[04:46] $400,000 depending on whether they did maximum pay to petitions throughout their time frame or not and The cash value was the same three or four hundred thousand So in other words, it was three hundred thousand dollar cash value with a three hundred thousand dollar death benefit with medium paid up additions and It was a four hundred thousand dollar cash value with a four hundred thousand dollar death benefit with maximum paid up additions This is what high cash value whole life insurance does in fact It’s what just regular cash value whole life insurance does it endows the cash value and the death benefit equal? At either age 100 or at age 121 That is not what the life settlement funds are buying

[05:30] life settlement funds by low cash value universal life policies that Oftentimes at the person’s age 80 or 85 or 90 the time at which a life settlement Company would be looking at it Have little to no cash value literally. They might have been paying premiums on this policy for years But it’s a completely different structure. And so the cash value is very very low The death benefit may be at risk Meaning if they don’t keep paying their premiums, they could lose the death benefit entirely and so what the life settlement company can come in and do is provide a literal cash out at a dollar figure that’s actually worth something like we’ve talked about four to seven times cash value and Then that life settlement company can pay those premiums

[06:30] Maybe whereas the family that used to own the insurance could not and Thereby that life settlement company can be assured of that death claim Whereas the family was looking at not being assured of the death claim because the nature of universal life is that the cash value is what gets used to pay for and support the death benefit and The rising insurance costs in universal life Start to implode the policy literally making the thing fall apart from the inside like a building would implode When the government bombs it to take it down on purpose, but they do it from the inside so that it’s safe It basically falls apart on itself That’s literally what these universal life policies do is they implode they fall apart from the inside

[07:26] Because they’re underlined structure is Just like a term insurance policy where the premium cost the actual cost of the insurance is rising rising rising rising and the whole life structure is Where a guaranteed cost exists so a guaranteed premium on whole life literally Ables whole life from being able to implode and these two types of policies universal life which are what support the life settlement industry and whole life which is typically not involved in life settlements at all are Though both life insurance to Completely different products now. I just gave you a big mouthful there I’m sure we’ve got some questions in your head that our listeners might have Well, I think the first thing would be what you know people are wondering

[08:19] Why would anybody ever buy one of these universal life policies? And I’d like to just point out that if you’re 40 years of age and you price out a whole life Policy and you price out a universal policy your initial premiums going in your Cost of insurance is going to be higher on the whole life policy But it’s going to be guaranteed and rain remain relatively the same now Because you’re buying a term policy each year in the early years of the universal policy it costs less for the insurance so the attractiveness is if I can put the premium in and have Less of it go to the cost of insurance in the early years of the policy Then it will grow big enough to outpace the later years of the policy as the cost of the insurance increases my very first life insurance policy bought

[09:22] 1988 was a universal policy and it was built on an anticipated interest rate of 18% You know how long that lasted? That was a short-lived deal and yet it’s so Appealing to people because they have just never been in Introduced to the concept of a whole life that can be such a great emergency opportunity fund for their families the second thing I would say though is if you do have a whole life insurance policy and it’s possible to have some big Whole life insurance policies out there and people let them lapse as well Maybe you can’t do a life settlement with them But please don’t let them lapse go to go to an insurance agent and see what your options are, correct? Absolutely. So this is a good thing to finish us up on if you have questions in this area reach out to us at hello

[10:22] At partners for prosperity comm if you have universal life and you no longer want it or need it And you’re in your 80s with severe health problems In other words life settlements are not bought on healthy eighty five-year-olds. They’re they’re bought on Eighty-five-year-olds that have been given a shortened life expectancy of two to seven years Then reach out to us. We that is not our primary business, but we can absolutely help you source the buyers for that type of policy But equally importantly if you have whole life insurance that you don’t want or need anymore There are a lot of different options that you have available to shrink the policy To reduce it down all the way to get you and your family out of premium payments

[11:07] Without losing the cash value or losing the policy itself And so we’ve got a new book coming out that I’ll start to talk about it’s still a month or two away But we’re really excited about it and it actually has some sample Reduced policies in it so you can actually see what these look like It’s called busting the life insurance lies and we’ll tell you when it’s available And of course there will be an audio version and this one actually is going to be read by a professional voiceover team Which will be kind of fun to hear since it won’t be Kim Butler’s voice. I’ll enjoy listening to that one, too So we just want to make sure that you know where you can turn to for help And if you’re 800 number at the insurance a company or the agency that you bought the policy from is not able to help you

[11:53] In any of these scenarios reach out to us at hello at partners for prosperity comm Typically with a couple emails we can give you some good suggestions Super another thing I have seen recently not it happens all that often is second-to-die policies and Convertible term policies are they are an option sometimes as well That is correct. Yes, those can be purchased by life settlement funds again Depending on the health of the seller the person that’s insured super Well, we hope this has been educational maybe for a small group of people out there But if you know of somebody who is in that category and might be thinking of letting a life insurance policy lapse Please make sure they understand all their options before they move forward

[12:40] This is no BS money guy Todd Strobel for the prosperity podcast. Thanks again. Everybody will talk to you again soon Thank you for listening to the prosperity podcast to take control of your money and have it work for you Visit us at partners for prosperity comm if you liked this episode, make sure you subscribe and leave a review