The Greatest Asset Owned by Seniors Might Not Be So Obvious

In 1981, the Social Security Administration published a report in the Social Security Bulletin that one, sought to identify the types of assets most commonly owned by retirees; and two, how those assets change as seniors advance through their retirement years.

Some of the observations contained in this report sound as though they were written last week, not almost four decades ago. For example, the report noted that “the financial position of many older and retired persons is precarious at best” and that “many older Americans find themselves with little choice but to considerably reduce their standard of living after retirement.”

And the message is just as applicable, if not even more so, in 2022: seniors need to identify all of the assets they own and determine if such assets are helping them achieve their financial objectives.

What Are Your Assets?     

Many seniors think of their personal assets as either their liquid cash on hand or specific material possessions — such as a house or car — that they could sell if they were in a pinch and need to generate some money. But it’s important to understand that not all assets can be physically seen; some are less obvious to the eye.

The Social Security Bulletin report identified five major asset categories that are most commonly owned by seniors, a list that is just as relevant today:

1. Total Assets (the aggregated sum of everything owned)
2. Home Equity (the home’s value, less any outstanding mortgages)
3. Liquid Assets (savings and checking accounts, stocks, bonds and mutual funds)
4. Illiquid Assets (businesses owned, real estate and collectibles)
5. Insurance Assets (life insurance and annuities)

Of course, the above does not include other retirement income streams (e.g., pension, Social Security, etc.), however, such streams cannot be converted to cash via a trade or mortgage.

In reviewing their portfolios, most seniors would immediately assume that their most valuable financial asset is their home — and for many seniors, that assumption is correct.  Or perhaps they would point to a growing portfolio of stocks and bonds they own, especially if it has increased in value over time. But for a segment of American retirees, one less obvious asset is consistently overlooked.

What Is the “Hidden” Asset?

A life insurance policy is one of the most valuable assets many Americans will ever own. First, it yields a tax-free death benefit payable to beneficiaries upon the insured’s passing. Second, it can be an instrument for accumulating cash – the cash build up inside of the policy - which can be used to either help pay the premiums in the future or as a source of income through policy loans and withdrawals.  And third, it can, which is still surprising to many, be sold for cash by qualifying seniors.

Prior to the late-1990s, there was essentially only one potential purchaser for a life insurance policy — the insurance company that sold the policy in the first place.   The only possible "offer" to accept was the policy's cash surrender value, which was of course set by the insurance company.

Therefore, traditionally, policy owners received little (if any) economic value from life insurance policies that they no longer wanted, needed or could afford.  As a result, many life insurance policies were simply lapsed by retirees to eliminate the premium payments.  The value of lapsed policies is enormous, and the Life Insurance Settlement Association estimates that 90% of all life insurance policies lapse before the insurance company pays out the death benefit.

Thankfully, times have changed.  Now, there is a growing and highly regulated “secondary market” for life insurance that allows policies with senior insureds to become liquid, like other assets.

How Do You Sell This Asset?

A life insurance policy is considered personal property that can be kept or sold. If the policy no longer serves its original intent, then one option is to sell the life insurance policy to a buyer who is willing to purchase the policy. The buyer pays the seller a lump-sum amount of cash, assumes payment of the premiums going forward, and collects the death benefit when the insured passes away.

This sale of a life insurance policy is called a life settlement. A life settlement is defined as “the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit.”

Candidates for life settlements are typically 65 or older and own a life insurance policy with a face amount in excess of $100,000. As the definition above confirms, a settlement is only possible when the policy’s market value exceeds the cash surrender value.  Current market activity and buying trends suggest that a large percentage of life insurance policies held by seniors are worth significantly more than their cash surrender value.

The key factors in determining the market value of a life insurance policy are the death benefit (face value amount of the policy), cost of premiums and the life expectancy of the insured.  In most cases, life expectancy is the most important consideration.  In simple terms, the lower the premium and life expectancy, the higher the market value of the life insurance policy.

Finally, it is worth noting that the decision to sell a life insurance policy does not need to be an all-or-nothing proposition. It may be possible to keep part of the policy coverage for beneficiaries and sell the remaining part through a retained death benefit life settlement.

Conclusion

Many seniors mistakenly assume that their only available cash-producing assets are the ones that they can touch and see.  But a more thorough analysis may uncover hidden assets that have potential value.  It is possible that the most valuable asset owned by a senior is a simple life insurance policy purchased many years ago — and if that policy is no longer wanted or needed, then a life settlement transaction may be an attractive option to explore.

To truly identify a life insurance policy’s market value and to maximize its potential purchase price in the secondary market for life insurance, it is important to work with an experienced and licensed life settlement broker like Welcome Funds, Inc.  Unlike the firms who buy the life insurance policies and represent institutional capital,  Welcome Funds, per applicable law, has a fiduciary interest to represent the best interests of policy owners.

For more information on life settlements or to receive a free appraisal of a life insurance policy, please visit www.welcomefunds.com or call 877.227.4484.