If you’re a financial planner who works with retirement-age clients, the topic of life settlements should be a regular part of planning conversations.
Life settlements allow a life insurance policyholder to sell their policy to an institutional buyer for more than the policy's cash surrender value, but less than the net death benefit. The purchaser of the policy assumes responsibility for all future premium payments and receives the death benefit when the insured passes away.
There are a number of reasons seniors may no longer want or need their policy. The policy may have become unaffordable (and thus in danger of lapsing), or the policy beneficiaries may be financially secure enough that the death benefits are not needed. Because life settlements are paid in cash to the policy seller in a lump sum, they allow those receiving them to essentially “unlock” the liquidity of the life insurance asset. Then they can use it for whatever financial needs they may have.
But life settlements aren’t for everyone, and this is where it’s imperative for financial advisors to conduct due diligence in exploring with their retirement-planning clients whether a life settlement is right for them.
Advisors need to educate clients and ask critical questions in determining how to best proceed.
Considerations and questions that need to be part of the life settlement conversation include:
The value of a life insurance policy in the secondary market is determined by carefully analyzing several factors specific to the policy and the insured. If a client is considering selling their policy, it is important to reach out to a trusted resource to properly evaluate the potential value. This information is vital to guide them in the decision-making process.
Is your client planning on buying a new policy with the cash from their life settlement? If so, will they be able to get a new policy with equivalent coverage and at what cost? If coverage is still needed, selling the policy may not be the best strategy if affordable replacement coverage is not possible. Additional options, like reduction of face amount or a retained death benefit, might make more sense.
Are there more alternatives for your client? Explore with your client whether they might qualify for accelerated death benefits.
How will a life settlement impact your client’s finances? Does your client receive some form of state or federal public assistance, such as Medicaid? If so, make sure the benefit of receiving a lump sum in cash outweighs the potential loss, if any, of these benefits.
How will a life settlement impact your client’s survivors? Help your client weigh out the the benefits of a lump sum in cash now with the costs of the loss of death benefits to heirs. For example, if a client has a $500,000 policy that they might expect to sell for $180,000, is the need for this cash sum greater than the $500,000 that survivors may need for future financial security?
Is your client prepared to deal with the tax implications? Every client’s situation will be different, but it’s important to explore the tax implications a life settlement may hold and ensure your client is prepared to address them.
At Ashar Group, we’re secondary market and valuation specialists who bring the tools, training, and experience that financial advisors need to confidently advise their clients on whether or not a life settlement is right for them. We adhere to the strictest ethical and compliance standards to safeguard retirees and others who wish to unlock the value of a life insurance asset.
If your client is ready to discuss a life settlement, contact us today.