Offsetting Declining Interest Income with Life Insurance Policies

The historically low interest rate environment for the past several years has negatively impacted retirees who have built financial plans on expectations of interest income from bonds and other fixed-income assets.

With interest rates declining for the past decade, retirement duration expanding, and most Americans required to self-fund the majority of their spending, funding a secure retirement — the primary financial goal of most Americans — has never been more challenging…,” writes David Lau in Dow Jones MarketWatch.

Lau notes that the traditional investment approach to retirement has been “to migrate from equities to fixed income when nearing retirement” in order to provide accessible cash, but “in the historically low interest environment we are in, that simply doesn’t work any longer.”

In response to this interest income shortfall, some retirees have opted for riskier investing strategies to make up the gap.  However, this approach subjects seniors to market volatility, slumps, and even crashes, putting them in danger of outliving their assets.

Revisiting Potential Income Sources

A smarter way to potentially recover lost revenue streams is to examine all sources of income. For most retirees, income sources flow from three categories: (1) Social Security; (2) Pension; and (3) Personal Assets (e.g., property, investments, etc.).

Since social security and pension payments tend to be fixed, the third category represents a variable opportunity to increase income without taking on too much risk.

Many retirees have discovered that a reverse mortgage can be a good strategy for unlocking cash flow from the equity in their residential property, especially if they are in their later years of retirement.

Another personal asset that is often overlooked is a life insurance policy. Many seniors are unaware that a life insurance policy is considered private property and can be bought and sold just like any other asset.

Examining a Life Insurance Policy

There are three primary ways that a life insurance policy can provide a source of retirement income, once it is determined that it is no longer needed, affordable or serving its original purpose:

1. Accelerated Death Benefit 

In what is also known as a “living benefit,” some life insurance policies include an Accelerated Death Benefit (ADB) option. It allows the policy owner to access a portion of the death benefit payment now. However, this is usually only available if a physician certifies that the insured has a life expectancy of less than six months. Accelerated Death Benefit (ADB) payments vary based on the rider in a life insurance contract, if available, and should be verified through the insurance company.

2. Cash Surrender Value

If a life insurance policy has a cash surrender value (CSV), then there is an option to relinquish the contract in exchange for that amount. In order to receive such cash, policy surrender forms are requested from the insurer after the sum is verified.  However, prior to doing so, it is always advisable to consider the third option below, which by definition, will always be higher than the cash surrender value.

3. Sell the Life Insurance Policy as a Life Settlement 

Yes, there is a viable, highly regulated market to sell a life insurance policy to a third-party investor through a transaction called a life settlement.  A life settlement enables qualified policy owners to sell their coverage to a “life settlement provider” — a licensed financial entity that purchases life insurance policies on the regulated secondary market for life insurance — in exchange for a lump sum cash payment. These funds can help offset the interest income that is no longer generated and be used in any manner whatsoever.

If an insured is at least 70 years old or is slightly younger with some health issues, then the related life insurance policy may qualify as a life settlement and could provide much needed cash in a matter of months.

But for a younger and relatively healthy insured, it is not wise to tap into a life insurance policy.  He or she would likely not qualify for a life settlement and the Cash Surrender Value (CSV) is probably not high enough to make a huge difference on a retirement income stream. In this situation, the smart approach is to keep the life insurance policy in force and revisit a life settlement in the future.

Regardless, there is one rule that almost all retirees who own life insurance policies are wise to follow: do not lapse or surrender a life insurance policy without exploring the life settlement option.

The First Step to Selling a Life Insurance Policy

Welcome Funds Inc. is a licensed and experienced life settlement broker and has a legal and ethical duty to represent the best interests of policy owners. The firm provides free, no-obligation reviews and appraisals of life insurance policies and gives honest, professional advice as to whether a policy should be kept as is, replaced with a new and better policy or sold as a life settlement.

The first step to a life settlement is determining a policy’s eligibility.  Then, the applicable paperwork and authorizations need to be completed.  Welcome Funds, to maximize the life insurance policy’s sale price, will negotiate with multiple qualified life settlement providers who compete to extend the best offer to purchase the life insurance policy. It’s that simple.

For more information about life settlements and to receive a free life insurance policy appraisal, please go to www.welcomefunds.com or call 1-877-227-4484.