As a wealth management professional working with high net worth individuals (HNWIs), keeping an eagle eye on any new strategies to protect assets is a must. Today, life settlements are breathing new life and value into term policies, freeing-up capital trapped in irrevocable life insurance trusts and helping advisors meet their fiduciary responsibility to clients. Life insurance settlements have been around for more than 20 years, and while the transaction is not for every situation and every life insurance policy, there are certain situations when the sale of a policy may not only be a good idea but also within the responsibility of a trustee or wealth manager.
For the uninitiated, life settlements enable an individual with a life insurance policy, typically a senior, to sell it on the open market for immediate cash. The seller receives payment that is less than the death benefit but higher than the surrender value – and the insured is no longer required to make premium payments on the policy. The purchaser of the policy will receive the death benefit payout when the insured passes away and must also continue paying the policy premiums.
The traditional reasons to sell a life insurance policy focus on the short and long-term needs of the insured. In most cases, the insured no longer needs the insurance coverage or can no longer afford it – and likely some combination of both. If the insured’s reason for owning the life insurance changes, such as following a divorce or after a spouse passes away, then a life settlement enables the insured to receive a payout on coverage which might have otherwise been surrendered. If premium costs rise and the insured can no longer afford to keep the coverage, then a life settlement can pay a lump sum for a policy which might otherwise lapse.
In recent years, additional scenarios have emerged which often make sense for policyholders.
Term insurance can be converted to permanent insurance and then sold as a life settlement. Term insurance remains one of the most widely used financial protection tools and generally falls into the category of “set it and forget it.” Buy term insurance hoping that you will never need it, and when the term expires, be thankful that you are still alive and well. However, term insurance with a conversion rider can offer a windfall for seniors. For seniors with policies that are nearing the end of their term, life settlement providers will evaluate those policies and even provide illustrations that include the cost for conversion. Seniors can convert the policies to whole life and perform a life settlement in one, multi-faceted transaction that will provide them with a payout and no out-of-pocket expenses. Financial advisors who fail to educate their clients about “term to perm” are doing them a great disservice.
ILITs require third party evaluation which may lead to a life settlement. Irrevocable life insurance trusts (ILITs) offer an exceptional way to help HNWIs preserve their wealth and manage future estate taxes. However, the life insurance policies held within such trusts may not be performing at satisfactory levels, as investable capital may be trapped paying for existing policies within the trust. Meanwhile, changes in estate tax laws may make the policies less important to the overall financial plan of the beneficiary. When trustees perform required evaluations of insurance policies within an ILIT, a life settlement may be in the best interest of the beneficiaries, by freeing-up capital for investment. Some licensed life settlement funding companies now perform annual policy evaluations at no cost, making the process simple and streamlined for wealth managers.
Fiduciary responsibility called into question. A recent California lawsuit suggests that advisors who fail to educate their clients about life settlements might be on the hook for damages. A closely watched class action lawsuit filed in California federal court alleges that Lincoln National Life Insurance Co. failed to disclose the life settlement option to clients. A California couple said that they lost money because the insurer didn’t tell them they may have been able to sell their policy -- rather than reduce their coverage -- had their agent told them about the life settlement market.
While not for every financial situation, life settlements remain a financial option that is growing in popularity. Wealth managers need to be aware of these transactions and keep a close eye on changing regulatory responsibilities.
Stephen E. Terrell is Senior Vice President of Market Development and Branding of The Lifeline Program, a life settlement provider based in Atlanta, Ga. For more information, call 770-724-7300 or visit www.thelifeline.com. You can also follow him on Twitter @LifelineProgram