Welcome to Season 2, Episode 32 of Meet the Expert® with Elliot Kallen!
In this episode, Elliot Kallen brings on Eric Carpenter to talk about life insurance settlements and how they work as an alternative option to cashing out or letting policies lapse. From policy types and taxes to probate and pricing, here’s everything you need to know to determine if your life insurance policy is a huge asset that you should sell.
Listen to the podcast here
Meet Our Guest
Regional Sales Director | Abacus Life
Eric is the Western Regional Sales Director at Abacus Life, the largest institutional buyer of life insurance policies in the nation. Eric graduated from Biola University with a BA in Sociology and holds his Series 6, 7, 63, as well as life/health licenses. He currently resides in the San Francisco Bay Area.
What’s the difference between life insurance and a life settlement?
Elliot Kallen: Good morning and good afternoon, everyone. I’d like to welcome you to another exciting episode today. Probably a subject that you know very little about, very interesting. It’s about selling your life insurance policy, or what a life settlement is all about something we’ve never talked about on these shows before. Let me welcome our guest here today, Eric Carpenter of Abacus Life. Welcome, Eric.
Eric Carpenter: Thanks a lot. Happy to be here, and really excited.
Elliot Kallen: Thank you. He’s the regional director here. Why don’t we describe what a life settlement is and then also what buying a policy even means. Why would somebody sell their policy and what kind of policies get sold? So, let’s start with what a life settlement is.
Eric Carpenter: Let’s start with it. Yeah, absolutely. Well, first of all, thanks for letting me be on I’m excited to be working with you. You’re right. Life settlements are very, either misunderstood or most likely not even understood at all. So I’m glad to be able to have an opportunity to educate and share. By definition, the life settlement is the technical term for selling your life insurance policy to an institutional investor. It’s important that the word institutional is involved.
Most people don’t know that a life insurance policy is their own property.
Okay, it’s their property. It’s not the insurance’s property and typically, especially for seniors that might be the largest asset. And so a life settlement is really the process of selling your life insurance policy to an investor. Abacus Life, which is the company I’m with, we are the largest institutional investor or buyer of life insurance policies.
What kind of policies are bought for life settlements?
Elliot Kallen: Okay. So we’re not talking about term policies. Now we’re talking about permanent policies, variable universal life, indexed life, whole life, those type of policies, correct?
Eric Carpenter: You would be surprised. Let me back up a little bit. I’ve been in the life insurance and long-term care industry for over 20 years. I love insurance. I think that life insurance and long-term care should be a part of everyone’s planning. I know it’s a part of Prosperity. But like I said, life settlements are a whole other thing. It’s a concept that most people don’t know about. But believe it or not, I just found out a year and a half ago, that we buy term policies all the time, and I can take you through all the reasons why somebody might sell their life insurance policy.
On what type of policies we buy, we do buy term insurance policies and our favorite is V well, so guaranteed universal life or secondary universal life, but we have by variable policies. We don’t normally buy whole life because they typically will have a larger surrender value and so if it makes it wouldn’t make sense, you know, if we can’t buy the policy for more than the surrender value, then it would make no sense for that for the seller.
Term policies, that’s like a win-win because term policies are like running a death benefit. It’s not an asset per se. There’s no cash value.
We buy the term policies that will convert the policy, then we take over the payments and we become the beneficiaries. And we buy them out. Obviously, it’ll be less than what the death benefit is, but it’s still it’s a win-win.
I’ll give you an example. Why would this happen? So let’s say you have two business owners, and they’re 65 years old, and they have bi-sales on each other and those typically are like 10-year 20-year return. What happens is they say the business is sold, and then they don’t need the policies anymore. Most of the time so they just let it lapse, but why not come to us we’ll price it out within what really takes us a day. Ultimately, it is an inforce illustration and we can find out whether or not those policies got a value out there on the secondary market.
“A life settlement is the process of selling your life insurance policy to an investor. Abacus Life, which is the company I’m with, we are the largest institutional investor or buyer of life insurance policies.”
Who’s selling a policy on the individual side?
Elliot Kallen: That’s pretty interesting. I know it’s different for a lot of people. So let’s talk about the individual person. I’m in my 30s or I’m in my 40s, and I bought a life insurance policy. I have little kids. Now I’m in my 60s. I’m set financially, I don’t really need the life insurance. It’s nice. As my friend who sells life insurance said, “Couldn’t everybody use another half a million upon death?” But, assuming they don’t. And so I see these commercials on TV to sell a part of or your entire policy. You’ve seen them advertise here all over Northern California. Who’s selling a policy on the individual side?
Eric Carpenter: Yeah, no, that’s a really good question. And you mentioned commercials etc. And I just want to put a little plug-in for my company Abacus Life. We just announced that we’re going public, so we’ll be the first life settlement company to be publicly held which is a massive, exciting deal for us. You’re probably seeing a lot more of us in the media as well.
The question you ask though is, why would someone consider a life settlement or selling a policy? This is not an exhaustive list, but this will give you an idea of why. Let’s say the policy is simply no longer needed or wanted. Right, it served its purpose. You don’t want to, let’s say cash was needed for retirement, or cash is needed for a long-term care need. You need to pull money out and it turns out that your policy is actually worth more than the cash surrender value. So that would be a reason. Premiums are no longer affordable. Happens. Financial assistance is needed to pay medical bills. A business is sold as I mentioned, and there’s a key person or a buy-sell in place.
Or if you’re exiting from a split-dollar arrangement which is a little bit more of a complicated conversation, or through the merger, acquisition, or bankruptcy. One of the big ones right now is unwinding premium finance cases, you know, with interest rates going up a lot of the premium finance cases that were sold, where you’re borrowing money to pay for the premiums, and it’s a great concept. It’s a great way to leverage money, but with the interest rates going up some of those assumptions they just might need to unwind and that will be another reason. And then yeah, there are other reasons that we can talk about, but those are the reasons why, you know, someone you’d mentioned who, like who’s selling the policy.
As far as an ideal client. So, an ideal client, Elliot, is typical if you want to be 75 years old or older. If you’re healthy, if it’s a healthy client and you’re 75 plus years old, we would be able to potentially price out that policy if it makes sense.
Now, you’re younger than that, that’s fine, but there typically would need to be some type of medical impairment. Okay, and then of course, if they’re critical or terminal situations, then, of course, it doesn’t really matter how old you are. You could be 40 years old, but if your life expectancy is, you know, two or three years, you know that obviously that all that policy will price. And like I said, we’re buying most types of policies. And I didn’t even mention this but we also have even bought group term, if it works in a convertible option. So hopefully that helps you answer those questions like that.
“I’ve been in the life insurance and long-term care industry for over 20 years. I love insurance. I think that life insurance and long-term care should be a part of everyone’s planning. I know it’s a part of Prosperity.”
Is my life insurance policy subject to probate when I die?
Elliot Kallen: Okay. And let’s talk about a little bit of the unknown ingredient here about taxes. People don’t know so my policies are taxable, but let me start with, I’m keeping my policy. I bought it. Years ago when my kids were young now it’s got 400,000 cash in there, it’s worth a million dollars. And it’s owned by me and at that time my kids are the beneficiary or whomever but there’s only one parent left and I’m the only parent here isn’t that life insurance policy as you describe property now subject to probate because I own it personally?
Eric Carpenter: Correct, although it depends on your life insurance. If it’s the death benefit, it will pass tax-free. But to your point, if there is no will or trust, it could be passed to probate.
How do taxes work if I sell my policy?
Elliot Kallen: So Eric, you’d never want the beneficiary to be your trust. You want it to be actual people, again, for all types of settlement reasons that we can talk about separately. When I’m selling my policy, right, I know that it’s there could be gains here. So how does this work in my tax situation?
Eric Carpenter: No, you’re right. So typically, when we purchase a policy and we give the client there could be a taxable income tax on the gain, but to be honest, typically in most cases the cash value in the policy doesn’t exceed the cost basis. So typically, there’s not but, of course, talk to your tax advisor for that, but there could be some capital gains with that in the terminal situation, meaning if they’re, well, just 24-month life expectancy, typically that half that the clients getting when we buy it is tax-free if if if a terminal scenario.
Is cashing out the policy a better option?
Elliot Kallen: Okay, so does anybody just with these permanent policies, the variable universal life, the index and universal so what does anybody just say at the end of the day, the heck with this? I don’t want to sell it I just cash it in and I’ll be done with it or does that just a bad business decision?
Eric Carpenter: Listen, what’s important is that your client knows that there might be another option. So I don’t know if you know the stat but over $200 billion of the life insurance contracts every year is either surrendered or they’ve lapsed. It’s a big, big number, and less than 2% of the population even knew that there might have been an option to sell it.
So what we do is that scenario that says you did have $400,000 of cash in the policy, and you’re either wanting or needing the cash, what we’ll do is we’ll analyze the policy and we’ll find out if the market value is worth more than the cash value obviously, or the cash surrender value. If the cash surrender value is more then of course you would surrender it and take the cash. I mean, ideally, honestly, the idea is you keep the policy in force because you bought life insurance for a reason.
Obviously, the death benefit, it’s gonna be more than what you would get for a settlement. But as I said, there are so many different reasons to sell it. But ultimately I do think it’s worth your time as an advisor and as your client to find out if they’re the fair market value out there. If it’s more than the cash surrender value, then it’s a no-brainer. And obviously, if it’s term insurance, for sure, no brainer, don’t let that thing lapse unless you get a price to see if there’s if it’s an asset for you.
What are the requirements that make the price worth selling?
Elliot Kallen: So let’s talk about term insurance and selling term because I didn’t even know that you could do that. And you mentioned earlier in the show that basically you need to have a terminal illness or you need to be 75 or above. Is that still true with the term policy?
Eric Carpenter: Yeah, it’s not gonna matter what type of policy that you’re dealing with. It just comes down to the cost of insurance and life expectancy. It’s just truly a math equation. Typically, it won’t price unless you’re older than 75 or, or if you’re you’ve got some kind of medical impairment, and those would be the two possibilities that would make it that potentially you can sell that policy for some value. But it doesn’t matter if it’s term or not.
How old is the target market for life settlements?
Elliot Kallen: So if I’m doing financial planning for people and people are thinking about, “I’m in my 60s and maybe I should buy some 15-year term policy for myself.” Now in the middle of their 70s, they’re thinking, “I really don’t need it anymore.” Like my kids are set, they’re in their 40s and 50s. I’m in my 70s. Is that a good target market for you?
Eric Carpenter: Absolutely. That’s a great target market. And like I said, business owners who are about that age or older, are also a great opportunity.
Elliot Kallen: The nice part about what I’m saying is when you’re doing planning, there’s a short-term need for a lot of times for life insurance. And the long term is going to go away and so people say well then I’m not going to buy it because it’s a bad use of my money.
If you have an alternative and say, “Wait, I have an asset here that I’m going to sell anyway, that’s five to 10 years no matter what, but I need it for the next five to 10 years. Price wise I want to do a term of 15 or 20, now you create an alternative for these people that they didn’t even know existed.
Eric Carpenter: Yes, sir. Yep. And then also like you could have people with a 20 and 30-year term from a long time ago that maybe now that their health is impaired they can’t get life insurance, and that term policies come due. I mean, that’s why you should always have your life insurance evaluated, right? And how do I do an audit on those things? Because here’s another thing. Life insurance, just in the last five years, has dramatically changed the types of policies and products. They have living benefits now. These are all reasons why you want to be having your policy reviewed to find out, is it the right one now. Do you need it anymore? All of that and selling your policy is an unknown possibility.
Should people be shopping around when selling their life insurance policy?
Elliot Kallen: Okay, and then when they see these commercials on TV, we see with the older couple and grandchildren, I know they’re actors. Because I’ve actually seen that gentleman have different commercials. For a moment I feel like they were my grandparents but then I realized, this is a commercial. It’s a very effective commercial or I wouldn’t think that we’re sitting on a chair at the end of these kids that are running grandchildren are running towards them with open arms and so forth and they don’t need to policies anymore. Is there a difference in companies between what people can get? Do they need to shop this with Abacus Life and not just the one on TV and accept the first quote?
Eric Carpenter: Listen, first of all, great question. And there’s a difference between a life provider and a life broker or an ally. We’re a life settlement provider. And what that means is we need to have access to lots and lots of funds. I mean, like money sources like private huge private equity firms like pension plans. So what we do have is relationships with, you know, 5, 6, 7, 8 depending upon the case, of all the funds that bid for these policies, believe it or not, it is a very, very sought-after asset because it’s an asset.
If you think about it, it’s an asset uncorrelated to the market. And so what they do is they take these policies and they put them all together in a portfolio, and then private equity firms, as I said, pension funds and others, they buy this as part of their portfolio. And so really, the main reason why you want to go with Abacus is we have access to all those funds but too.
We also are one of the few if not the only firms that has an exclusive arrangement with one of the largest if not the largest private equity firm as well that we have access to that money. What we do is we put the funds against each other and they make bids based on what they’re seeing as far as life expectancy, and the policy we present.
That’s a great question. You also want to look at the fact that these commercials, they’re really encouraging the client to go direct to their to them and they’re leaving the advisor out. They’re leaving you and in other financial provided. I think it’s important that you’re the one who’s taking your client to the market and standing next to them and being a part of that process because a lot of the time if its client direct these providers can take advantage of the client. The clients are not savvy, and they can just throw out a number that the client would not know otherwise would exist. Where that’s never going to happen with you.
How does a hybrid life settlement work?
Elliot Kallen: What’s really interesting is I hear conversations all the time about how did Warren Buffett make his money, Berkshire Hathaway, and people don’t realize that they made money in lots of ways. I mean, these people are brilliant, but he did it in this exact way.
Making money by buying what companies have bought life insurance policies over the years and made a fortune just doing that. It wasn’t just picking out companies that are public and being at the right time to the right place.
These are cash cows because people die and leave big settlements. Plus, they don’t need them anymore. They don’t want to pay for it anymore. And that’s exactly the niche that we’ve been talking about here.
Eric Carpenter: There is a form of settlement that I didn’t mention, and what we call it, we call it a hybrid or retained death benefit or RDB. And this is a scenario where you have a client that still wants to leave a death benefit, right? They bought, let’s say they’ve got a $5 million policy, they still want to leave a little bit of a death benefit to their heirs, but they also want to cash out and not have to pay the premiums anymore.
So what we do with that is it’s called a retained death benefit. And we’ll end up buying the policy like we’ve been talking about, but instead of giving them an all-cash offer, we’ll retain some of the death benefits. So their beneficiary, let’s say it’s a church or charity or their kids or trust, whatever it is, they can retain a certain amount of that death benefit. And then we can also give them cash. So it serves as a really great solution depending upon the scenarios that are going on. I met with, it was a really an unfortunate scenario actually, a financial advisor who owned more policies on himself right.
So he sold himself for policies. He’s you know, he’s beneficiaries, a spouse, or what he did ended up he sold one policy to cash in order to get his affairs in order, but he left the other policies in force. So that would pass you know, there are all sorts of ways we can skin this cat to make sure it’s working. You know, the solution for your clients, because every client is different, right? Every client has got a different name.
Elliot Kallen: That’s a good point. It’s a difficult subject. It’s a difficult conversation to have and we need the insurance. And now because of the information that you’ve disseminated, you’ve now got people now have an option that they could talk to us about to bring somebody in like yourself to help out, get a quote and realize that there’s a fair way to deal with life insurance. To not just take the first quote and not just tear up your policy and throw it in the garbage and say am I paying for it anymore? The insurance company gets to keep a lot of premiums and basically all that cash value instead of them reaping the rewards.
Eric Carpenter: Now it’s true that the insurance carriers don’t like us that much. If you think about it because you know, they’re priced into the policy lapse rate. In term insurance, less than 2% of the death benefit is paid. And the insurance carriers know that, so they price that into the product. So when we keep these things enforced for life they’re not super happy about that.
Let me leave you with this. It’s a calculator that your client could go onto your website, plug in their little, you know, really five little things, you, they’re the male or female, type of policy, and then it’ll come out and give them an idea of what their policy might sell for. I can get you more information on that if you wanted to have that as a resource for your clients. But it’s a really great tool for us. Just because it’s a super simple way to kind get an idea of whether or not your policy pays or has value I should say.
Elliot Kallen: Eric, that’s great. Thank you the answer of course is yes.