Women: What You Don’t Know Can Hurt You in Retirement

When the team at Harbor Life Settlements set out to better understand viewpoints on retirement planning, life insurance, and life settlements, we weren’t expecting to uncover a gender gap. But that’s exactly what happened. Our 2020 Life Settlement and Retirement Survey, answered by more than 1,700 adults around the country, revealed some unsettling differences between women and men. For one, working women in the U.S. are 28% more likely than men to say they’re not on track to have enough money to comfortably cover their medical, living, and retirement expenses after they leave the workforce.

That feeling of unpreparedness may have some roots in the different career trajectories experienced by women vs. men. Women, on average, earn less and work fewer years than men. That translates to lower overall retirement contributions and a reduced Social Security benefit. But there’s more to the story than numbers. Some women may also play a lesser role in household financial decisions. And that can create knowledge gaps around retirement-related topics like life insurance. Our survey supports that theory. Among our respondents, women are 87.5% more likely than men to not know what type of life insurance policy they have. As well, women are 32% less likely than men to know what a life settlement is.

Life insurance and retirement planning

Life insurance has a role to play in retirement planning. For that reason, anyone, male or female, who doesn’t view life insurance as a financial asset is at a disadvantage. Those folks risk leaving money on the table — by overlooking the ways life insurance can add to their liquidity and financial independence in retirement.

Permanent life insurance, specifically, can be an easy source of cash for retirees. These policies have a cash value feature that functions like a savings account. Deposits are made automatically with each premium payment. Those funds are then invested according to the policy terms, so that the balance grows over time. The policy might specify a fixed or floating interest rate or give the policyholder the option to invest in stock and bond market funds. Whatever the investment style, the resulting earnings have no immediate tax implications. They’re tax-deferred indefinitely, unless the policyholder surrenders or sells the life insurance for an amount that’s greater than the total cost of premiums.

Surrendering or selling a life insurance policy are two ways policyholders can permanently cash-out the investment made in those policy premiums. A surrender is the more common strategy of the two — but it’s often not the best move financially. In a surrender, the insurance provider will cut a check to the policyholder for the cash value balance less any outstanding loans and surrender fees. Premium payments are canceled, and the policy’s death benefit is no longer in force.

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Life settlements: A lesser-known source of cash

Surrendering life insurance for cash may sound like a nice deal, especially if the cash value balance is substantial. But selling the life insurance in a life settlement usually generates much higher cash proceeds. Unfortunately, many policyholders — particularly women — don’t realize they have the option to sell their life insurance.

Life settlements aren’t terribly complicated. The right life settlement company should manage the process, starting with a no-obligation estimate of the policy’s value. That value is a function of the policy’s type, size, cash value, and premiums, as well as the policyholder’s age and health. Typically, life insurance is most marketable when the policyholder is aged 65 or older. Permanent life policies are in demand, but term life insurance that’s convertible to permanent may also qualify for a life settlement.

The life settlement company will typically work with a broker to set up a competitive auction for the policy. While it’s an option to sell life insurance directly to a buyer without a broker’s involvement, that often results in a much lower sale price. The auction process encourages buyers to put their best price forward, because they know there’s competition for that policy. A policy might go through two or three rounds of bidding before offers are finalized. At that point, the policyholder can accept or decline the highest bid. 

If an offer is accepted, there’s some paperwork involved to finalize the transaction. Once that’s done, a lump sum of cash is transferred to the seller of the policy. There are no restrictions on how those cash proceeds are spent, although a portion of them may be taxable. After the settlement is complete, the buyer is responsible for the premium payments and has full ownership of the policy’s cash value and death benefit. 

Life settlements are regulated in most states, which ensures protections for selling policyholders. Buyers, called life settlement providers, must be licensed in regulated states. Providers that are members of the Life Insurance Settlement Association (LISA) must also certify their adherence to a code of ethics annually.

Living benefits: When you want to keep your life insurance

Life settlements are lucrative, but they’re only appropriate for policyholders who no longer want their insurance. There are, however, other strategies to pull cash from life insurance while keeping the coverage in force — these are called living benefits. Two common ones are loans against cash value and direct cash withdrawals.

Life insurance loans carry low interest rates and lax repayment requirements. Some insurers don’t ask for repayments at all, though policyholders would owe interest on the outstanding balance. If the loan isn’t repaid, the balance is deducted from the policy’s death benefit later. No application or credit qualification is required for a life insurance loan. If the policyholder has enough cash value to support the loan request, the insurer simply mails out a check within a few days.

Cash withdrawals don’t accrue interest and don’t have to be repaid. Unless the policy specifically states otherwise, a cash withdrawal will reduce the policy’s death benefit.

Life insurance loans and cash withdrawals normally aren’t taxable. They can become taxable, though, if the policyholder later surrenders the policy without repaying those cash advances.

Some policies may incorporate more specific forms of living benefits, such as accelerated death benefits or long-term care riders. These features are usually unlocked by a chronic or terminal medical diagnosis. They allow the policyholder to pull cash from the policy specifically to cover healthcare costs.

Closing the knowledge gap

Women today can’t immediately fix the gender gap that challenges their ability to save for retirement. But they can address knowledge gaps that affect their sense of retirement preparedness. As the Harbor Life Settlements survey revealed, a good starting point is understanding life insurance, and the ways it can generate cash for healthcare and other expenses in retirement.


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