Attorneys who provide estate planning are quickly realizing that life settlements can present an incredible opportunity for their clients. A life settlement is the sale of a life insurance policy to an institutional money source for substantially more than its current cash surrender value. It also can be for a percentage of the death benefit. A life settlement offers policyholders a way to eliminate high premiums and still capture value from their policy.
Let’s say that you discover a life insurance policy, previously issued on a senior (65+) client, which is no longer needed to protect the estate. That insurance policy actually may prove to be more valuable to that client today as a life settlement than upon maturation some date in the future. Or what if you happen to have a client who wants to sell an insurance policy but still feels the need to carry life insurance? This is referred to as a “retained death benefit” option that will give the policyholder a lump sum payment while retaining some portion of the death benefit to be paid to the policyholder’s beneficiaries directly from the life insurance company.
WHO SETTLES LIFE INSURANCE POLICIES?
- Individuals: Insured, as the policy owner; spouse, as the policy owner; and children of the insured, as the policy owner (paying the premiums).
- Businesses: “Key man” policies; buy/ sell agreements; and when the business is no longer a viable entity or experiences a change of officers, etc.
- Trusts: Policies held in irrevocable life insurance trusts or other trusts.
- Nonprofit Entities: Charitable groups that receive policies as donations or policies that charities themselves own.
WHAT TYPES OF POLICIES CAN BE SOLD?
- Joint Survivorship Universal Life (Second to Die policies).
- Term Policies (as long as they are still convertible).
- Universal Life (UL).
- Whole Life.
While circumstances may change, there is one constant – an estate planning attorney must be fluent in life settlements, both in their fundamentals and in the options they present. By becoming familiar with the wealth of life settlement options, you as an attorney are increasing your value to your clients.
Here are a few examples of how life settlements have made a positive impact on policyholders:
77-YEAR-OLD FEMALE. $3,000,000 UNIVERSAL LIFE. OFFER: $435,000.
After the estate planning was completed, the trustee determined that there was no longer a need to keep this particular policy. The trustee was going to let the policy lapse because there was no cash value. However, after a life settlement was suggested, money was found where the trustee thought none existed.
89-YEAR-OLD MALE. $10,000,000 UNIVERSAL LIFE. OFFER: $2,500,000.
The policy owner was over-insured and was going to let this policy lapse. A life settlement feasibility study was performed and the policy owner secured a $2,500,000 offer for a policy that was no longer needed.
76-YEAR-OLD MALE. $200,000 UNIVERSAL LIFE. OFFER: $85,000.
The family simply could not afford the premiums any longer. With only $6,000 of cash value in the policy, it was running out of steam, and the cost of insurance was increasing. Through a life settlement, the policyholder was able to receive 14 times more than the cash surrender value.
As an attorney, ask yourself the following questions:
- Do I have clients who have had changes in their own or their family’s estate planning?
- Do I have clients who may need liquidity?
- Do I have clients who may be considering allowing their insurance policies to lapse?
- Am I truly familiar with life settlements and how beneficial they may be to my clients?
Your fiduciary responsibility is both ongoing and evolving. This enhanced knowledge will enable you to be proactive for your clients and their families. And when it comes to counseling them in regard to their changing needs and finances, it will set you apart from others who are not familiar with these virtually unknown planning tools.
CHANGES IN THE LAW
The 2012 passage of the American Taxpayer Relief Act (ATRA) rendered obsolete the need for many wealthy individuals to own life insurance for federal estate tax reasons. Also, the current low interest rate environment negatively impacts investment returns for universal life policies issued decades ago. With the long-term care crisis growing where millions of aging, financially strapped consumers are seeking ways to finance the ever-rising costs for health care and nursing facilities, life settlements are a unique and undervalued planning tool that should be considered when addressing the needs of your clients. Retirement income planning would not be complete without making sure your clients’ best interests are considered. It makes no sense to simply surrender or cancel an insurance policy without at least seeing if a settlement is right for your clients.
Life insurance is an asset that needs to be managed, and estate planning is always evolving. Due diligence on your part will save you and your clients unnecessary headaches in this litigious society.