A 2015 survey of financial advisors by the Lifeline Program confirmed what those of us who work in the life settlement industry confront on a daily basis: Many financial advisors are unfamiliar or misinformed about life settlement transactions.
According to the survey, 40 percent of financial advisors only have a limited familiarity with life settlements or are entirely unfamiliar with these transactions. Only 11 percent of the financial advisors who were surveyed had assisted in the sale of a life settlement or had recommended these transactions to their clients.
Unfortunately, the lack of familiarity that financial advisors have with life settlements has led to a number of lingering misconceptions held about this important financial planning strategy. In this column and more to follow, I’ll shatter some of the common myths in the financial planning industry that lead to false perceptions about life settlements.
For starters, here’s a myth that I hear from even some of the most experienced financial services professionals and insurance brokers: “A life insurance policy is something you need to hold onto until the death of the insured.”
Purpose of Policy
It’s important for advisors to approach a client’s life insurance policy the same way that they would view any other asset in that client’s portfolio. Start by revisiting with them the reason why they purchased that policy in the first place. Chances are, the original appeal for buying a life insurance policy was one of these factors:
- Help fund educational expenses for their children in the event of their untimely death
- Provide an inheritance for their surviving spouse and children
- Produce income for their estate from a tax-free vehicle
- Pay for funeral expenses or other debts that would need to be paid, such as a home mortgage
There are other possible reasons, of course, but for most of your clients, the answer is likely to revolve around the basic idea that they were trying to provide financial relief for their loved ones in the event of their death.
But did you know that nearly 88 percent of universal life insurance policies and almost 85 percent of term life insurance policies never actually result in a death claim? That’s because many of your clients find themselves in a very different place during their senior years – when they’re most likely to pass away and for the death benefit to be paid out – than they were when they first purchased their life insurance policies.
First, many seniors have had the pleasure of watching their kids complete their education, turn into adults and then start families of their own, assuming financial responsibility for their own lives. Those heavy burdens your client once felt to make sure their spouse and kids were provided for may no longer exist. Second, a lot of your clients have seen their income taper off during their senior years and are now more reliant on Social Security and/or their savings for a fixed income. Those insurance premiums that used to be no big deal may now be occupying a larger chunk of your client’s annual budget.
For your clients who’ve decided they no longer need or can afford a life insurance policy, you can potentially save them from a major mistake – and can perhaps generate significant cash for you to manage in their portfolio. For example, they might be able to keep the policy in-force through a loan or use of the cash surrender value, seek an accelerated death benefit, assign the policy as a gift or charitable contribution or perhaps seek to sell the policy through a life settlement transaction.
Unfortunately, each year more than $100 billion face value of life insurance lapses by seniors over the age of 65 – mostly from a lack of knowledge that an unneeded or unaffordable policy may be sold.
So rather than insisting that seniors should hold onto a life insurance policy until death no matter what the circumstances, the message instead should be that a life insurance policy is an important asset in a client’s portfolio and should be treated like any other asset. Specifically, it should be routinely evaluated as to its purpose, performance and strategic benefit in a financial plan.