One of the most frequently asked questions we receive when speaking with advisors is, “How do I identify life settlements cases?” Financial professionals and fiduciaries want to know how to best serve their clients but aren’t sure what situations are a good fit for a life settlement.
The great news is, you don’t have to become an expert in the secondary market to identify opportunities in your current practice. In most cases, existing life insurance is an aspect of every planning discussion you have with a client.
Here are 5 planning situations where the policy valuation and life settlement conversation have an important place in the discussion with the clients you already have.
Retiring business owners and/or principals with key person insurance.
Many businesses, large and small, take out key person insurance on key people in the business – founders, CEOs, or employees who bring unique, valuable knowledge to the organization (like an employee who develops a patented product). The insurance is designed to help the business continue to run in the event of that person’s death or disability.
If that person retires or leaves the business, the policy may no longer be needed. Rather than simply surrendering the policy, the business may be able to sell it. Or, if the ownership was transferred to the insured, the insured can initiate a life settlement.
In many cases, retiring business owners are 70 years or older – a good fit for the secondary market. Term policies carry no cash value, but the policy may contain significant fair market value, which could result in a sizeable payout to the policy owner.
Clients who bought life insurance policies for estate planning purposes.
If you have clients who’ve purchased life insurance for estate planning, you may have a great opportunity to uncover a life settlement case.
The 2017 tax reform increased the estate tax exemption to $11.2 million per individual and $22.4 million per married couple. Since life insurance has long been the cornerstone of estate and tax planning, clients are deciding whether they need to keep the policy that was put in place for estate tax protection.
Policies that are held in Irrevocable Life Insurance Trusts (ILITs) may be good candidates for life settlements due to changes in estate tax exemptions.
Philanthropic clients who donated their policies to charitable organizations.
Clients who have donated their policies to charitable organizations will continue to pay the premiums until they pass away. With the rising cost of premiums across insurance carriers and people living longer than projected, many donors may find themselves with policies that have a low cash value and high premium.
Life settlements can be excellent solutions to this problem, allowing the donor to gift the organization a large sum of money – much higher than the policy’s cash value – while eliminating the costly premiums for themselves.
The settlement option can be initiated by the charity that already owns a donated life insurance policy, working closely with the donor. On the other hand, a donor could choose to sell a policy and donate the cash received instead of the policy itself.
In either case, the donor is able to see the benefit of their gift while they are still alive, which is a rewarding experience.
Parents who bought policies to provide for heirs who are now financially independent.
Many seniors still own and pay premiums for policies they bought to provide for their children when they were young. When those children grow up and become financially independent, the parents continue to maintain the policies – even when the premiums become a burden.
Clients in this situation can stand to benefit greatly from life settlements, as they can use the funds generated for other areas of their plan as well as reallocate premium payments to more pressing needs.
Seniors who need to fund their retirement and/or long-term care.
While we all plan as best we can for what’s to come, there are countless seniors who end up needing more funds than they saved during their working years – whether to cover retirement, or to pay the high costs of long-term care.
For these families, life settlements can be lifesavers.
The financial stress of paying for long-term care is often spread among the patient’s adult children or other family members, and that stress can have a serious negative effect on quality of life. Instead of spending quality time together and enjoying each other, family members spend much of their time consumed with financial worry.
Life settlements can give these families an infusion of cash that they can put wherever they need it, so they can get back to thinking about what really matters: each other. It also frees up the money the adult children are spending on care and allows them to allocate it toward their own retirement plans.
Conclusion
Chat with your clients about their changing life circumstances and see if a life settlement may be the right fit for them. You may be surprised by how many of your clients could benefit from selling their life insurance policy.
