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Life insurance and life settlement

The first wave of boomers is approaching retirement and, in a recent survey, almost half those born in the twenty years immediately after the end of World War II are worried they may not have enough money to be able to live through retirement comfortably. This is slightly surprising since more than half this age group have life cover. In fact, of all the generations, they have saved and invested more which, of course, partly explains the current worries. When the property bubble burst in 2008 and stock values fell so sharply, many people found their retirement investments seriously reduced. As a result, many boomers are now planning to delay their retirement as long as possible, hoping to rebuild their savings. The other factor in all this is the steady increase in life expectancy. When the boomers were planning their finances back in the 1960’s and 70’s, most expected to live through to around 70. Now the average expectancy is 79 years with women living on into their 80s. Indeed, with the improvement in medical care, the number of people dying fell by 36,000 in 2009. When you realize you may have to find the money to support yourself for another ten years, this puts a big strain on savings.

So are the boomers right to be worried? In practical terms, the answer is probably “yes”. It’s going to take many years for property values to recover. Without the security of positive housing equity to offer as collateral for a loan, this forces more people to use up their savings more quickly. If inflation rises, this will force a hike in interest rates. Although this is good for those with savings, it puts anyone still holding a mortgage under pressure. Any debts on credit cards also look bigger and take longer to repay. All this is manageable to long as there are no crises. But if there are hospital bills or any other large expenses, this can create real problems.

The best answer may be the market in life settlements. If you hold a policy with a cash value, you can sell the policy for more than the insurer will pay as surrender value. The way it works is simple. The individual or company buying the policy pays the premium installments and then collects the amount payable when you pass on. This is a good deal in three situations which may overlap: you need quick cash; your family circumstances have changed and there’s no one depending on you to leave a cash sum; or it’s become a strain to maintain the installment payments and you risk the policy lapsing if you stop paying.

Before you approach this market, you should get proper advice. If you are holding a life insurance policy worth at least $250,000, you may be able to get a good lump sum depending on the amount of the premiums and your current state of health. The usual advice is to hold on to the policies for as long as possible before offering them for sale. If you are at least 70, the life insurance policy will be worth more — fewer installments to pay during your remaining years.

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