For some charities, life insurance is a taboo subject, and they often surrender donated policies without any analysis. With approximately 51% of the U.S. population owning life insurance, it’s too large an asset class to omit from charitable planning discussions with donors, particularly considering the tremendous opportunities.
What would you do if you could free up $600,000 a year and unlock $5 million in hidden value without selling a single traditional asset? That was the question facing a family office managing the estate of an 85-year-old patriarch who had spent a lifetime building a family legacy.
Over the past two decades, a reliable secondary market for life insurance has emerged with an auction process that can uncover a policy’s fair market value (FMV), which can be vastly different from its current cash value. Life insurance is an asset your clients own. When was the last time it was appraised? Like your clients’ other ordinary property, it is important to value their life insurance property before they materially change it or terminate it.
By evaluating clients’ existing policies, advisors can uncover opportunities to convert underperforming or unneeded life insurance into liquid assets through the life settlement solution that can be reinvested to align with clients’ broader financial goals.
The aftermath of COVID-19, the rise of AI tools, and new regulations are transforming how consumers engage with life insurance. Many of the largest wealth management and investment firms now offer independent consultative platforms for financial advisors and Registered Investment Advisors (RIAs) to partner with firms that specialize in services outside their wheelhouse—like longevity analysis and valuation of life insurance assets. It can be a valuable tool for planning firms aiming to thrive by providing comprehensive solutions. Whether preventing financial disaster or optimizing asset allocation for high-net-worth families, the life settlement market can be crucial in comprehensive financial planning and business growth.
As an estate planner or investment advisor, you may be faced with a client who asks you for advice about considering a life settlement for their insurance policy. A life settlement is an option for a policy owner to sell and exchange their life insurance policy for a lump sum payment that’s higher than the cash surrender value and less than the death benefit.
Historically, uncertainty in financial markets increases life insurance lapse activity. Think about your parents and the large number of baby boomers who are retiring every day or already retired. What are they worried about? According to the 2023 Transamerica Center for Retirement Studies Report, the most often cited retirement fears are declining health that requires long-term care (36%), Social Security will be reduced or cease to exist in the future (36%), outliving their savings and investments (35%), possible long-term care costs (30%), not being able to meet the financial needs of their family (30%), and cognitive decline, dementia, Alzheimer’s Disease (29%).
Advisors are asking their compliance departments, “How can I tell my clients that I provide comprehensive and holistic financial planning, yet not disclose the life settlement option when it is appropriate?” With an aging population, many clients prefer to receive a buyout of their existing life insurance for an amount that is higher than their cash surrender value, providing liquidity for investments and other retirement needs.
Life insurance can be the largest unmanaged asset a client owns. Policy owners allocate significant liquidity on an ongoing basis, often long after they transition out of the original need that the policy was put in place to protect. Discussing the opportunity to take an illiquid asset and monetize it when clients are going through a financial transition, whether to fund business, retirement, long term care or charitable endeavors, can be a powerful client conversation.
Fiduciaries can take some preliminary steps to identify at-risk clients, starting with asking clients three questions.
