Baby boomers are currently facing an issue in the midst of retirement: The gap between their income and their expenses is growing, and there are limited opportunities to close it.

Many are shocked to learn how much the cost of health care factors in to the retirement equation. According to Fidelity, a 65-year-old couple retiring in 2016 can expect to spend about $260,000 on health care—considerably more than most couples anticipate. Downsizing or part-time work can help, but these strategies are difficult for some and impossible for others.  

Many retirees are unaware of the market value of an important asset they already own: their life insurance policy. After paying premiums for decades, they may know about their policy’s surrender value. But most are completely unaware that the market value may be significantly higher than the surrender value—thanks to something called the secondary market for life insurance.

The secondary market for life insurance is active and includes insurance agents, financial advisers and other intermediaries. It’s also growing: Conning Research estimates that seniors annually represent a potential $182 billion in life insurance policies.

In this market, retirees can sell their policies to third parties for more than the surrender value, but less than the policy benefit. In these transactions, seniors often receive a settlement worth four to 10 times their policy’s surrender value. The purchaser continues to pay the premiums until maturity. A policy owner can also choose to sell less than 100% of the policy benefit and receive less cash up front.

Candidates for these transactions are seniors who no longer want, need or can afford their life insurance policies. High net-worth clients may own a policy they purchased when their life circumstances were much different. Perhaps their children are grown with careers of their own, meaning they no longer need the coverage the life insurance provides. In other instances, premiums have increased to the point where they’re no longer affordable. Often, policyholders either turn in the policy for the surrender value or simply stop paying and let the policy lapse.

If you have clients considering this, talk to them about the possibilities of the secondary market. It could provide them with a necessary financial benefit they’re not even aware of, which can help defray medical costs or pay for long-term care. Others may use the proceeds to augment their retirement income, provide gifts to family members or donate to a charity.

In some instances, seniors may be eligible for a cash payment, while retaining a portion of the policy’s benefit and ending their premium responsibilities. These blended transactions can be attractive to those who want to provide for heirs.

Of course, there are tax considerations. In brief, if the cash or other consideration received on the sale of a life insurance policy exceeds the inside build-up under the contract, the excess may qualify as gain or exchange of a capital asset. For example, a policy with a $500,000 face value could have a $75,000 settlement amount with a $65,000 cost basis. The result in that transaction would be a $10,000 capital gain for tax purposes.

And what about buyer’s remorse? It’s actually not common when a client sells their life insurance policy, for a few reasons:

• The policyholders who sell are typically faced with an imminent termination of the policy because they can no longer afford the premiums or no longer need the coverage. The payment they receive can be far more than it would be if they lapsed or surrendered their policy.
• Following industry standard, the policyholder should receive disclosures in writing and understand all the implications of the sale, including the tax issues, alternatives and risks.
• To eliminate the potential for a seller or beneficiary to make a claim after the sale, the policyholder should obtain a competency certification from their own attending physician. The beneficiaries should also acknowledge the sale.

Still, the agent or entity sourcing policies should make sure they have coverage under their errors & omissions insurance.

Selling a life insurance policy is not a one-size-fits-all transaction. The market value of every policy is different, but typically, the policy is universal life or convertible term; the candidate is 65 or older; and the face value of the policy exceeds $100,000. Companies in the secondary market can purchase policies via referrals from insurance agents and financial advisers, or through brokers. It is often insurance agents who contact settlement brokers, who in turn act as coordinators for the process by shopping a policy to multiple companies in order to find the best price.

Life insurance policies are financial assets—and these assets may have the power to change lives financially. But only if your clients are aware of it.  

Bill Acheson is CFO of GWG Holdings, Inc., a specialty finance company in the secondary market for life insurance. GWG (NASDAQ: GWGH) is headquartered in Minneapolis.