There were two old gentlemen sitting on a park bench watching the day go by when one turned to the other and exclaimed, “Fred, one of the nice things about being so old is we don’t have to worry about dying too young.” This brought a little chuckle from the other old man and they went back to just sitting on the bench watching the day go by.
Earlier in the lives of each of these two men were the stresses and strains of getting an education, finding a meaningful occupation, choosing a companion they could spend a lifetime with, anxiety regarding the military draft, upturns and downturns of the economy, raising a family, accumulating enough wealth so they could retire someday, what religious faith would they follow, what political leanings would they have, and a myriad of other unknowns of life. Now that life has answered all those scenarios, where do they find enjoyment in the golden years of their lives?
For better or worse!
There is an old adage which states the only difference between an old man and an elderly gentleman is how well he prepared for his future. Another graphic display of this concept is a young man and an old gentleman standing at the two ends of a mailbox. The young man is placing an envelope in one end of the box while the old man is taking an envelope out. The old man takes his envelope out and as he walks away he morphs into a weary threadbare stooped over old man with an anxious look on his face, while in the same picture the old man takes his envelope and morphs into a gaunty, well dressed man facing the sunset with a happy countenance and contented smile. The caption at the bottom of the picture is addressed to the young man, “How well are you preparing for his future? It all depends on you.”
So the one main reason of replacing earning power has pretty much been completed, why would they consider maintaining their life insurance policies?
Two weeks after the old gentlemen were sitting on the park bench, one of them found himself with his wife sitting on a drift log overlooking the Oregon Coast. As the sun was going down, the storm which was brewing just off the shore began to intensify, causing the old couple to wrap their blanket more securely around them. While the storm raged, he looked upon her countenance as she snuggled closer to him. He saw in the twilight the fading color of her hair and the wrinkling of her brow. She had given him the best years of her life; and now in this twilight of her life he realized if he were to pass before her, she would still have financial obligations to attend to. He smiled inside knowing they had planned for such an event. While maintaining a comfortable lifestyle, he had set aside premiums to pay for life insurance which would step in when he could no longer provide for her. He realized one of the greatest love letters she would receive would be delivered by someone else. The living benefit to this senior was the peace of mind he felt for completing his promise “for better or worse” given so many years ago. The warmth of the blanket and the comforting thought of the security of the future made this storm like all the other storms of life bearable and even joyful.
A letter arrived in one of the old men’s mailbox which stated, “Mr. Retiree, we are sorry to inform you but due to economic and financial conditions we did not anticipate, your 401(K) retirement plan benefit will be reduced to one half of your projected retirement payout. We are sorry for the inconvenience this may cause you. We will keep you informed if things change. Sincerely, Employer.”
What are my settlement options?
This can’t be happening to me! Where can I go to replace that needed income? Much to his relief, the old man’s wife reminds him they purchased life insurance which had guaranteed cash values as part of the policy contract. Upon contacting their life insurance agent, they discovered there are several guaranteed settlement options for accessing those funds.
1. They could take a loan against the cash value which would have a set interest charged against the loan amount. This would keep the policy in force with the loan being paid back at the time of death or paid back if the insured’s financial circumstances allowed him to, and at his convenience. The loan would not be taxable up to the amount of premium paid over the lifetime of the policy–clean and simple, with the proceeds normally paid within a few working days. If the company was in a real financial struggle, they could postpone payment for up to six months.
If your insurance company were to default, the mechanism is established in each state for customer’s rights to be protected by the surviving companies. Department of Insurance regulations are very stringent in regards to companies being able to meet their financial obligations. Where some financial institutions are allowed to leverage their lending power to 1 dollar for every 7 loaned, life insurance companies are leveraged 1 dollar for every 3 loaned. It is also set where each insurance company is required to pick up its proportionate share of a life insurance company going into receivership. So, if a life insurance company has 15% of the business being transacted in a State and a company were to default, that surviving company would take 15% of the failing company. The company does not have to pay out on projections of the failed company, but they must honor the guaranteed cash values projected.
Having only to pick up its proportionate share has kept the life insurance industry from falling into the death trap experienced by the saving and loans industry of a few years ago. In their case, when one institution went bankrupt, the next one in line had to pick up the difference. It had a domino effect because some of those companies were simply not big enough to handle the shock.
One final thought regarding the guaranteed cash value provision has to do with just the size of the life insurance industry and how it is so spread out over so many companies and so well diversified geographically, demographically, and economically. It is reported the insurance industry is second only to the oil industry in amount reflected in gross national product (GPA).
2. These settlement options are available if you choose to simply cash out the policy, interest only. You request the insurance company to calculate the interest accrued by the cash value and pay that to you on an annual basis.This keeps the guaranteed cash value earning interest until death occurs, and then the remaining cash value is paid as a death benefit to beneficiaries. This may be a reasonable method of infusing money into your budget when you are pretty secure in the monthly amount you already have access to.
3. The set amount is the option for liquidating the cash value over a predetermined amount at intervals you establish. You tell the insurance company how much you want at what interval and they calculate for you how much you will receive.
4. With pay out over a certain number of years, again the insurance company will determine that amount and pay accordingly.
Something to keep in mind when selecting a settlement option is once the option has been selected it cannot be changed, with the exception of interest only where you could change to another option, or with any of them going to cash only where the company will simply pay you the balance of unpaid cash values. If death occurs before proceeds are completed depleted, the remaining values will be paid as a death benefit.
These then are the guaranteed settlement options in life insurance policies, which have been around for many years.
What about selling your policy to a third party?
The following living benefit to a senior citizen is the new, and considered by some innovative, way of generating cash from an existing life insurance policy. It is the marketing method of selling a life insurance policy to a third party who has no financial interest in your living or dying at the time of the issuance of a life insurance policy. Even though it is still true that someone has to stand to have a financial loss in the event of one’s death in order to be named as a beneficiary at the time of a life insurance policy being issued, the insurance company has no say as to who eventually can become a beneficiary. Consequently, the marketing to buy an existing life insurance works on the premise that once a life insurance policy has been issued, the insurance company has no control as to who will receive the death proceeds. So if you want to get more from your policy than the cash value, you can sell the face amount for a reduced amount to someone who is willing to cash you out. They then hold the policy until you die, whereupon they file a claim and receive as the beneficiary the full death benefit.
It is interesting what a capitalistic marketplace can generate for making a profit, and it will be interesting to see if life insurance regulators will somehow close that loophole. It may be a legal transaction, but it doesn’t seem ethical or moral for someone to purchase that policy and be able to financially be rewarded for someone else’s death. This benefit was never intended when life insurance policies became mainstays in a person’s financial planning, but times may have changed to where this will become mainstream for a source of income for a retiree. Just hope some senior citizen doesn’t sell their birthright for a cup of pottage.
In summary, the panoramic view of life insurance settlement options opens a wonderful vista of possibilities. The morbid view of only being of value when someone dies is replaced by a more palatable view of funds being available at many avenues of life in order to enhance the richness of life.