Retirement For Life

Life Settlements: Getting Value From Your Unwanted Life Insurance Policy with Rob Haynie - Ep 30

• Christian Cyr, CPA, CFP® • Season 2 • Episode 30

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Rob Haynie, a 30-year veteran of the life settlement industry, shares how retirees can get substantial value from unwanted life insurance policies instead of surrendering them or letting them lapse. He explains the process of selling policies to investors who offer competitive bids, often resulting in payouts significantly higher than surrender values.

• Approximately 90% of life insurance policies lapse or surrender, leaving potential value unclaimed
• Universal life policies are most commonly settled, followed by term policies approaching conversion deadlines
• Life settlements can be a better option than surrendering policies, especially when premiums become burdensome
• Tax implications include ordinary income tax on surrender value and capital gains tax on amounts above that
• People with terminal illnesses (under 24 months life expectancy) may receive tax-free proceeds through viatical settlements
• "Retained death benefit" option allows policyholders to keep a percentage of death benefit without paying premiums
• The industry is now regulated in 45 states with consumer protections including a 15-day rescission period
• Institutional investors value life insurance policies as uncorrelated assets unaffected by market fluctuations

To learn more about life settlements, contact Rob Haynie at rob@lisettlements.com, call 954-599-4433, or visit www.lisettlements.com.


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Intro:

Retirement for Life, your passport to a comfortable and confident retirement. The podcast that's equal parts education and entertainment, where we break down the retirement maze with a dash of fun and a heap of wisdom from your host, Christian Sear, CPA, the passionate retirement specialist and president of Sear Financial Wealth Advisors. The independent registered investment advisor specializing in the AIM retirement system.

Christian Cyr, CPA, CFP®:

All right, welcome to the Retirement for Life podcast. Today is a fascinating episode. I'm gonna give you an example, a real life example. I remember it like it was yesterday. My aunt approaches me. The uncle has this life insurance policy. They are paying 10, $12,000 a year on that life insurance policy. The inevitable question, of course, as a financial advisor who works with retirees, is Chris, do I need this life insurance policy? I think I should just cash in and get rid of it.

Christian Cyr, CPA, CFP®:

Today I'm going to introduce you to Rob Haney. Rob has been in the life settlement industry for 30 years. He's helped thousands of people negotiate and settle life insurance policies for value another potential alternative. Now, rob, I'm not going to go through all of your credentials because we try and keep this podcast short, but you certainly have a long list of credentials. Vice Chairman on the Board for Life Insurance Settlement Associations. Apparently, last year, rob, was a busy year for you. Looks like you won not one but two awards in the life insurance industry and you're currently serving on a ton of boards. So, rob, thank you for being on the Retirement for Life podcast and welcome.

Rob Haynie:

Thank you, my pleasure to be here. Can't wait to get the conversation going.

Christian Cyr, CPA, CFP®:

He is sitting in Florida, sunny Florida, although today he tells us perhaps it's a bit rainy. Rob, before we start talking about life insurance, just really quickly, how does a guy wind up spending 30 plus years in the life insurance settlement arena? How did you get there and what's the background that you want to share with?

Rob Haynie:

us. It's a. It's a. It's a great story and also a very boring story, but the end result was funny.

Rob Haynie:

I I'm at the gym as I was at that time in my life in 1993 pretty consistently, and I kept seeing the same people and one of the guys that I sold told me he just started a new career and he was in this business where he was helping people sell their life insurance policies and they were dying from HIV and AIDS and other terminal illnesses. And I'm sitting there listening to the gym thinking that is easily the most ghoulish thing I've ever heard in my life. I've never really heard anything. It's just like that's. It doesn't even sit right with me. I don't understand. I didn't even ask any more questions about it, but I heard enough that it stuck with me throughout that workout.

Rob Haynie:

As I'm driving home I got about one traffic light away from the gym and I had a stop sign and I went. Wait a minute, I got it. You're keeping the insurance companies honest. You're letting people use their life insurance for while they're alive as opposed to while they're dead, so you're putting life back into life insurance. I'm in.

Rob Haynie:

I told my then girlfriend before she was my fiance and my and my mother and father, and all three of them said I was insane. All of my friends said I was nuts. I quit my job in commercial real estate and went to work about an hour drive away and I went to work with a lot of people that are still in this industry today in Tavares, florida, and we been an hour drive away and I went to work with a lot of people that are still in this industry today in taveras, florida, and we were a broker, which which is the business model that we still uh deploy today, where we represent the seller for life insurance policies, and we love it because we were taking them from an asset that they basically has been hidden from view on purpose by some or they just don't understand has any value to others, and show them that there is value inside a life insurance policy if you meet certain qualifications.

Christian Cyr, CPA, CFP®:

Wow. Well, we work with retirees every day, on a daily basis, and because Emma and Andrea have been sitting across from our retirees for years, I thought I'd bring them on today to pepper you with questions. But before they get started, just give us, for those who are listening, an overview of what the basics of a life settlement might be, the simple terms and how the process would work for life settlements.

Rob Haynie:

So you mentioned retirees. So we're in that same universe. People that are retiring in their 60s who own a life insurance policy, and the original reasons they may have own a life insurance policy and the original reasons they may have taken that life insurance policy out when they were 35, 40 years old are gone. The house is paid for, the kids are grown up, they've left the house and that life insurance premium tends to get more expensive as time marches on. And they said what are they doing? So we already know that 90 percent of all life insurance policies lapse or surrender. We know that that's just what they do. That's how it's designed.

Emma Bean, CFA®:

Well, they want to tell you that or not?

Rob Haynie:

So people who fit that criteria can come to a group like myself and they can say can you please tell me what this is worth today? And we'll do two things we're going to collect medical information and we're going to collect insurance information. And then we're going to create, we're going to send it out to all the different entities that buy life insurance policies and kind of pit them in the uncontrolled position of being in a bidding war. No one likes to compete for something, but we force them to do that and they'll bid as high as they can. And we'll give that information to the, to the advisor or the client directly and let them, him or her, make that decision as what's best for them, typically.

Rob Haynie:

Having said that, most people always take the life settlement when the option is lapse or surrender. Some people I'll just say this to be in all fairness sometimes it becomes very real when we give them that offer and the policy all of a sudden has a lot more value to them, knowing what it's worth compared to what they thought it was worth, and they may keep that policy. They may keep it for a couple more years and sell it later, and they may keep it all the way to maturity. But we just want to give them the opportunity to really understand that their life insurance policy is an asset, just like their home. It has all the characteristics of real property. They can deal with it just like they can with their home. It has all the characteristics of real property. They can deal with it just like they can with their home.

Emma Bean, CFA®:

And this is another option for them to find cash in an asset they didn't know that they could avail themselves of. We have a wide variety of clients and we see all different types of life insurance policies. What type of life insurance is best when we're talking about life settlements, and what type of policies can actually we look into for life settlements?

Rob Haynie:

Great question. So all of them work. But if I had since I'm on your podcast you asked me a direct question.

Rob Haynie:

The majority of life settlements that we've done over the years have been universal life. That's been the most common. Firm policies is now the second most common because, as they keep moving, this age where they're coming to visit you for the first time, they're moving also up against what their conversion option, where they're going to have to convert that policy. Maybe it's seven years old. What's interesting about that is they're typically healthy. They're not going to really get much for their policy. But when you surrender, when you lapse a term policy, you get nothing. So if they get even a tiny little bit of money, they're fine with that. What's good about that for an advisor like yourself is there's money to work with there because there's a conversion that takes place that you might be able to participate in as well when you convert them to the other product that they get moving forward.

Rob Haynie:

So whole life tends to be the least attractive for some reason, because it tends to work better than others. It tends to absorb a lot of cash on hand, so it kind of works. It doesn't really have. It's not really a fire sale, if you will, gul IUL VUL. Second, to die all work. What we tell somebody is, rather than sit on the phone and discuss whether you think something's going to work or not, let's take a peek at it. We can run it up the flagpole, meaning we're going to take and show it to the top three buyers and say, hey, is this a case industry?

Christian Cyr, CPA, CFP®:

And if it is, then we know we have something and that's the best thing, andrea, now that I know you have a question for Rob, but I'm just going to put you on the spot right here. We've been working together for 13 years. How many universal life insurance policies have we sold in 13 years?

Andrea Brannon, CFA®-IF:

We don't sell them.

Christian Cyr, CPA, CFP®:

We don't, and we usually find that people Rob to your point they're worried about can I keep making payments? Is it going underwater? And now we have this amazing opportunity to actually get value for that right. Yeah, all right.

Emma Bean, CFA®:

Sorry.

Christian Cyr, CPA, CFP®:

Andrea, I know that's okay.

Andrea Brannon, CFA®-IF:

I was just curious yeah, I was just curious about the tax implications and how people plan for that.

Rob Haynie:

Another great question. So I'll first get my disclaimer that my attorney tells me to say every time. I'm not a riser and don't give tax advice. But I'm going to tell you a couple real truths on this about on this podcast. So number one if you forget settlements, if you surrender the life insurance policy, okay, and whatever that number you get is, you will pay ordinary income tax on the difference between basis and surrender. If you go above surrender and move into what they call the settlement arena the difference there you're going to pay long-term capital gain. That's the universal belief that you're going to pay about 20% there. Now, if you are a viatical settlement candidate, you will pay no taxes. There will be no taxes on its own with a life expectancy of 36, 24 months or less. Now this is a statement that I say and my attorney says I can say, because it's true I've been doing this a long time.

Rob Haynie:

I do not know any of my clients swear to God, hope to die that have ever been audited by the IRS for a life settlement. I don't know any. Now I'm sure they're all paying their taxes like they're supposed to, or they're not, I don't know. But it just seems to me that the IRS has better things to do. Because here's the key the policy that's being sold is being sold to an investor and that investor is going to pay taxes when they get the return. So they're getting tax revenue off of somebody that was getting ready to get thrown in the trash, and I think they'd rather injure the investor than the seller.

Rob Haynie:

I don't know that to be true. I just think that I'm just being. If you put me on a polygraph and said, do you know any of your clients that have been audited by the IRS, and I said yes, it would go off as a lie because I don't know any. So my belief is, like I said before we got started here talk to your financial professional, talk to your CPA about uh, and I'm sure there's a couple thousand ways that you can put that money to use in a way that'll be tax efficient, more time efficient.

Christian Cyr, CPA, CFP®:

And that's a great point that I didn't think about, because if we hold on to our life insurance policy and we end up, or our beneficiaries end up receiving that death benefit, we all know that typically that's not a taxable event. So what's happening here is the policy holder is getting some sort of value and, yes, perhaps paying some capital gains taxes which, as you mentioned, are generally favorable to ordinary income tax rates, and so to some degree this is a windfall of certain magnitude for the IRS, because all of a sudden there's this asset that there is going to be little or no taxes paid on, and now all of a sudden we're giving the IRS some money. So that's a great point. So you mentioned that whole life policies typically don't work. My question is about the value of these life insurance policies. When are the cases where it doesn't make sense, that you've seen where it's like it just doesn't add up and the opportunity for a life settlement really just isn't there? Is there any one typical example?

Rob Haynie:

where you're going to say no Again. These are great questions. Think of that as math. So you've got two things you're going to carry with you. You're going to have the life expectancy, whatever that number is let's make it say it's seven years, right. And then you have the premiums and we're going to optimize the premiums. You're going to know exactly what the minimum is to pay that carrier to keep that death benefit level. If somebody's premiums are 3% of face and they've got a seven-year life expectancy, that's going to work every day, all day. That's going to be an easy number.

Rob Haynie:

Where we run into trouble is when the life expectancy gets to be higher and the premiums correspond are no longer 3%, they're 4%, they're 5%, they're 6%, they're 7%. And that's where it becomes frightening to an investor because the words they use are tail risk. If they buy a life insurance policy and they pay so many premiums, before you know it they paid more in premiums than they're going to get back in death benefit. Also happens for policy owners. In some cases they start paying in all these exorbitant premiums because they inefficiently paid the premiums, they got too much cash or whatever they did. So we again go back to my thing. Call us up. If you've got a client, you're not going to have a practice like yours who doesn't sell any universal leg bosses. He's going to have thousands of opportunities, but I bet you're going to get five to ten a month.

Christian Cyr, CPA, CFP®:

That's fine. Oh, we get people walking in with them for sure. Yeah, there's opportunity.

Rob Haynie:

That's the other thing is I tell people like yourself, one of my favorite agents, his first thing question he asked his new clients when he meets me, he's in, he's in, uh, southern california, newport beach. That's how many other life insurance policies do you own? Because he knows newport beach. He probably knows five or six agents that sold him 13 policies. You know, say give me those policies.

Rob Haynie:

He becomes the age of record on all of them and he finds the least efficient policies they have, like this one is why are you paying for this death benefit? It's four times more expensive than this death benefit. We're getting rid of that one. And that's what he does, because you've got to understand the client. The client doesn't know what they don't know. And if they tell me, if like, oh, I should have this life insurance because Ed Jones says it happened and Bill Thompson said I should have it. But next thing, you know you've got $42 million of death benefit and you really only need about 10. So that's the windfall we look for, because then you're going to repurpose those monies again and get them in. The better products and I believe that the term is commissions are earned by the person who gives that information out to the client and I think that's an incredible opportunity because you've earned those commissions. You've earned every penny of them.

Emma Bean, CFA®:

Makes sense. Yeah, we do see clients all the time come in and compare what they're paying on their premiums to their benefit and sometimes it just doesn't make sense. So when they're looking at that cash value amount, can you tell us a little bit about when they're comparing that to, maybe, what they might receive from the life settlement? What's the relationship there?

Rob Haynie:

So, like I said in the beginning, that is literally the first offer you get is the cash return value. So if you have a term policy, your cash-to-earner value is zero. So you're kind of really anything beats that. But in universal life you've got the cash value and there are other policies. It's sitting there and then you've got to say to yourself can I give more money, can I give an offer higher than that? Some people have a lot of cash. They're younger and they're healthy and when you see the premiums that are being paid, you just know it's not going to work. But I don't like to look at things from that standpoint. I like to really investigate it, to really see if there's a chance, because there's a couple of things you can do. You can take all the cash out or use some of the cash to pay the premium. You don't have to excuse me in that regard. So you can just say, okay, I'm no longer paying premiums, I was going to take the cash. People have done that. That's a way to go. People don't even know you can do that. They're like what I'm like yeah, that's what it's for you have, and so there's little things you can do there. Also, you can split policies in two sell one, keep half, sell one half, keep the other half.

Rob Haynie:

Really, we also do a retained death benefit. This is a newer wrinkle. I don't know if it'll work for your clients, but it might. Somebody's going to say they want life insurance but they don't want to pay for it, which is like, which is pretty much how I operate my entire life and that doesn't work. But I try and do that. But you say, okay, well, how do I do that? You say, well, you have this million dollar life insurance policy and you don't want to pay for the premiums anymore. You don't have the money to pay for it. Maybe another reason why what are my options? So a retained death benefit. What they do is they record you at the carrier level on the transfer of ownership 90% to the buyer and 10% to you. So now you have $100,000 death benefit. You'll never make another premium payment and when you pass away, it goes to your estate and your estate uses that to pay for your funeral.

Rob Haynie:

That's interesting, it's interesting and that's you know, because I know you're going to ask Angie there's there's looking at with your CPA about the tax ramifications considered in some shape way, shape or form a gift, so to speak. But what it does is alleviates the burden and make sure that the family has the money. There's families that just there I just was on the phone before this podcast they are just frightened to death of their children getting a hold of any of their money.

Andrea Brannon, CFA®-IF:

Yeah, definitely they're. Like I'm not giving them a, just frightened to death of their children, getting a hold of any of their money.

Rob Haynie:

Yeah, definitely they're like I'm not giving them a dollar, they will blow it in five seconds and you have to. They have ways to make sure it doesn't happen. Well, that's one way to do it keep the death benefit uh, client, kids don't even have to know it's there um and then um and then ultimately, they get when they, when they passes away. Whenever that time is that money is released into whomever's in charge hopefully not the kid.

Andrea Brannon, CFA®-IF:

So if someone were to take a settlement, is it something that they get a period of time to change their mind?

Rob Haynie:

Yes, and Chris, you can use this. Before the turn of the century, when I was in we, we who were up in Florida writing the law to really help people understand. So, because we felt like if we get in front of the regulation, we become more credible, and in doing so, we adopted a what was called a timeshare specific clause, which called a rescission period, which allowed you the ability to change your mind to your point in a certain timeframe, in this case, 15 days. So that gave people the pressure was off, they can actually have the money. They could not sleep with it and they could say I don't like this, I got to give it back, and they can unwind the transaction and everything goes back to the way it was before.

Rob Haynie:

Now I will tell you that that very rarely happens unless the person dies in the rescission period, and that has happened. Sometimes they die unexpectedly. Their life expectancy was much longer, other cases it was not. It was a foregone conclusion. They were going to pass away, but they used the money. They wanted to use the money for a family reunion or something like that. So each situation is different. I say every case is a snowflake and in this case it is. And, yeah, there is a cooling-off period and people like that.

Andrea Brannon, CFA®-IF:

Yeah, they just like to know they can yeah because they don't feel like they're getting crushed Right.

Christian Cyr, CPA, CFP®:

Okay, so just touch on the ethics of this. Theoretically, the people that are buying your policy want you to die. You know it's a weird dynamic. Um, perhaps I would just want to go out and buy a life insurance policy right now and sell it tomorrow for a profit. Um, where are some of the gray areas, or some of the the ethical things, or maybe perhaps even laws, that are in place?

Rob Haynie:

we had them all. We had them all. We had them all in the beginning. But I always started this.

Rob Haynie:

I was on a panel one time with the CEO of John Hancock and MetLife and they were trying to say that there was a potential for nefarious activity. And I said interesting. I said because that means that they would also be potential for nefarious activity. When you I said interesting, I said because that means that they would also be potential for nefarious activity when you sold someone an annuity, I'm like what do you mean? I said well, if you just got $10 million from a young lady or an older woman, and this was a single premium, immediate annuity, and you ran her over the bus the next day, that'd be pretty good for you, wouldn't it be? And then that ended the discussion right then and there. So we were unregulated in 1993, except in two states. We're now regulated in 45, which represents about 93% of the US population.

Rob Haynie:

If there was ever a time For somebody to do something nefarious, it would have been in the 90s, when there was no oversight. The people who were selling the life insurance policies on were typically older, older men who had lost either a lover or had a lover and were dying from HIV and AIDS. They were ostracized by their families. They didn't have any friends. People running away from like the movie Philadelphia, and nothing ever happened. Have any friends? People running away from like the movie philadelphia, and nothing ever happened. So obviously, I say because barney fife from the andy and griffith show could solve that by lunch time when somebody were to pass away who just sold a life insurance policy. So that's the point. People like to think that you could. That's that. That's there.

Rob Haynie:

The people buying the policy today I should say the institutions that are buying it have got far too much to lose than to commit murder for a quick gain. Okay, this is the law of large numbers. They are buying this asset because if they can buy enough of it it'll smooth out a bell curve. Meaning the entire line that I'm throwing in the sky here, the whole line is the life expectancy. They may say you're going to live 68 months, but you could definitely play pickleball next weekend and die. You could also live way beyond your life expectancy. So if you buy a lot of those policies, the majority of them are going to pass away when you expect it. You're going to have some that pass away early and some that pass away late. So that's really what you have to think about.

Rob Haynie:

These institutions like life settlements because they're uncorrelated. When they buy a life insurance asset and the market goes down like it's done the past two days because we're having tariff war with outer space or whatever we're doing, those people the life expectancy on the insured they bought stayed the same, the death benefit stayed the same, the premium stayed the same and they don't have to look at that today because they're looking at all these other things. They're not looking at their life insurance holdings. So that's why this asset they want to buy more. I might maybe say this you know, I'll say it again there are much more money to be deployed today than ever in the entire time I've been in this industry, but there's not enough policies.

Rob Haynie:

So if you're ever a seller, this is the best time to be a seller, because they are fighting to get the policies. They have to get them. They love this asset. It's an alternative asset. Some of these institutions are required to buy these types of assets. They can't just keep putting money into the piggy bank and expecting it to grow. They've got to be everywhere. So this is an up-and-coming emerging asset class, if you will, because it's A-rated paper the biggest companies in the world. I always tell people, when you think about the financial collapse of 2008, 2009, they handed out part money. Did they hand that out to insurance companies? No, no, no, why they didn't need it. Think about that.

Christian Cyr, CPA, CFP®:

They're well capitalized institutions.

Rob Haynie:

The world is collapsing financially, they didn't need a dime from anybody. Yeah, that's it. That's why they like this paper. They like to see you know, john Hancock they like to see the Pacific Life commercial during the golf commercial.

Rob Haynie:

Yeah they may love it and they and they want to buy more of it. So hope that answers your question. It's kind of a long way to get there, but that's really, you know, the asset. The asset itself is stable, but it has to be understood by the person that buys it. Life insurance is, I can tell you, most agents I've met have no idea what they're selling. The majority of people that own life insurance have no idea what they bought. But the people in my side of the fence that buy this policy, they know exactly how life insurance policy works and that is why life insurance companies hate them, because, god forbid, someone would pay the optimized premium and the real, just pure cost of insurance than all that extra money they get from everybody else.

Christian Cyr, CPA, CFP®:

Rob Haney. So what we learned today is that the majority of life insurance policies end up being cashed out or canceled, which means a large majority of policy owners typically potentially are making a mistake and foregoing perhaps a nice large payout. Better than just simply canceling a policy. There are so many factors involved age, death benefit and things of this nature. So, rob, if we want to ask you more questions, how in the world could we find out more and get in contact with you?

Rob Haynie:

Very simple and get in contact with you Very simple. My email address is rob at lisettlementscom.

Christian Cyr, CPA, CFP®:

My cell phone 954-599-4433. Or you can visit us at wwwlisettlementscom. Lisettlementscom. Rob, thank you so much today for sharing your time with us. This is something I just cannot wait to talk to more clients about and talk to people about opportunities that maybe they're not aware of. We appreciate your time and we hope to catch you soon in the future. Thank you very much.

Rob Haynie:

Thank you so much Appreciate it.

Outro:

Investment Advisory Services provided by Sear Financial Inc. Sec Registered Investment Advisor in the future. Thank you very much. Thank you so much. Appreciate it.

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Christian J. Cyr, CPA, CFP®

Host
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Andrea Brannon

Co-host
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Emma Bean, CFA

Co-host