Sometimes dealing with the details of life insurance can be overwhelming for professionals who lack expertise in this particular market. I’ve written over and over again that it’s more complex than most people realize. I can talk until I’m blue in the face about bringing this up for conversation while highlighting the dramatic mutual benefit to advisors and their clients; only a minority will get on board.
I can’t give up on trying to urge advisors to do something that’s so easy and so benign that they won’t fight it; something with such an outsized benefit that it would be silly not to layer it into every conversation. I think I’ve settled on something with a threshold so low it’s a non-issue.
When you have the opportunity to do so, don’t ever, ever, ever let a client surrender or lapse a life insurance policy without talking to you first. I don’t care if you are the estate planning or business attorney, the CPA, the trustee, the family office, the non-profit of choice, the financial advisor or the neighbor across the street. There’s too much at stake and very few people realize it.
What do the numbers look like? My understanding is that there are roughly 300,000 policies in force in the United States. The annual lapse/surrender rate is historically around 4 percent (a little lower for permanent polices and higher for term policies). That’s over 10 million policies a year that fall off the books one way or another. Purportedly, over a million policies with more than $100 billion of face amount lapses on just the seniors. Given this, I will simply say millions of policies lapse annually with billions of dollars of death benefit and trust no one argues with me.
Why does this matter and why should you never ever let a client lapse or surrender a policy without running it by you? Here’s why:
- for your senior clients, many of these policies could qualify for a life settlement
- for the millions of permanent, cash value policies, essentially every one of them is in either a gain or a loss position
Why does this matter?
- for those qualifying for a life settlement, meaningfully more money may be available than by simply surrendering or lapsing, sometimes dramatically more
- for the permanent polices in a gain position, your clients need to understand the tax consequences before surrendering or lapsing as there may be ways to reduce, eliminate or defer the taxes
- for permanent policies in a loss position, though a “loss” in a life insurance policy isn’t generally deductible, there are effective ways to salvage the loss, shelter gain or take future loss
I’ve been involved firsthand with bringing millions of dollars of value to clients who were on the verge of throwing the value out the window. This is all cleanly above board with no games or risk whatsoever. It follows all legislation and tax code. Not taking advantage of what’s plainly offered is like selling an investment at a loss or paying thousands of dollars in mortgage interest and not telling your accountant. It’s like throwing artwork in the garbage and not realizing it was worth thousands, if not millions, of dollars.
Untold millions of dollars in tax savings alone are being flushed down the crapper every year. Many millions more are lost in unrealized settlement opportunities. When I try to get people to listen, they think I am being “sales-y”. Damn my predecessors in this industry! I understand the knee-jerk reaction, and I’m guilty of it myself. There have been a number of times I reflexively rejected a “sales pitch,” whether on the phone, through an email or in a store, only to eventually listen and realize it was objectively a better deal and I’ve been needlessly wasting money or inconveniencing myself for who knows how long.
I’m not sure I can offer something with a lower threshold of resistance to bring to the advisor market for the benefit of their clients. For their sake, please consider adding this to the conversation.