Life settlements are becoming an increasingly viable option for policyholders who no longer need, want, or can afford their life insurance policies. For financial advisors, understanding when a life settlement might be the right solution for a client is a critical part of offering comprehensive financial planning services. A life settlement can provide clients with a lump sum of cash, reduce the burden of premium payments, and allow clients to maximize the value of their life insurance policies, which might otherwise lapse or be surrendered for little to no value.
This post will explore the key indicators that may suggest a life settlement is a viable option for your client. By reviewing these factors and understanding the nuances of life settlements, you can better guide your clients toward a decision that could greatly enhance their financial position.
1. Tired of Paying Premium Payments
One of the most common reasons clients consider a life settlement is because they are simply tired of paying ongoing premium payments on a policy that no longer serves their needs. Whether the policy was initially purchased to provide a death benefit for family members, cover business obligations, or serve some other purpose, life circumstances change. For seniors in particular, the ongoing costs of life insurance premiums can become burdensome, especially if their financial situation changes or if they’re living on a fixed income.
For example, a client might no longer require the policy because they no longer have dependents, or their financial position may have shifted such that they can no longer afford the premiums. If your client is tired of paying for the premiums but doesn’t want to let the policy lapse with no return, a life settlement can provide them with a lump sum of cash in exchange for the policy.
Why This Matters for Advisors:
Advisors should watch for clients expressing concerns about paying premiums, especially as they get older. A life settlement could be an opportunity for your client to liquidate an unwanted policy and put that money toward other financial goals or pressing needs.
2. Received a Notice From the Insurance Company That Premium Payments Are Increasing
Another key trigger for a life settlement is when a policyholder receives notice from the insurance company that premium payments are increasing, particularly on permanent or whole life policies. The increase in premiums can be substantial, and many clients simply cannot afford the hike. This situation is especially problematic for clients who may have been under the impression that the policy would remain affordable for the long term.
In some cases, the increases may be due to the insurer adjusting the cost of insurance, a trend that is becoming more common as insurers attempt to adjust their pricing structures to account for rising longevity and other actuarial factors.
If a client is faced with a significant premium increase, it may be time to discuss alternatives, including a life settlement. Depending on the policy’s face value and the insured’s age, the client could receive a lump sum that is far greater than the policy’s cash surrender value, which is often the alternative offered by the insurer.
Why This Matters for Advisors:
A sudden increase in premiums could signal that the client is nearing the point where a life settlement makes sense. Advisors should evaluate the policy’s potential market value versus the increasing premiums and explore whether the life settlement option would be more advantageous.
3. Considering Selling Investments or Assets to Obtain Some Cash, Perhaps a Life Settlement Can Be the Answer
Clients in need of cash might consider selling investments, real estate, or other assets to meet their financial needs. However, depending on the client’s situation, liquidating investments might not be the most tax-efficient or practical option. This is where a life settlement might present a viable alternative.
For example, a client may be facing significant medical bills, wanting to pay off high-interest debt, or trying to fund a large one-time purchase. Selling off investments or assets may not be ideal, especially if it triggers capital gains taxes or a reduction in long-term wealth. In contrast, selling a life insurance policy via a life settlement could provide the client with a lump sum of cash without incurring the same tax consequences.
Why This Matters for Advisors:
As a financial advisor, you should be proactive in considering life settlements as an option for clients in need of cash. This option may be less disruptive to the client’s overall financial plan than selling other assets or investments.
4. The Level Premium Payment Period Has Ended for a Term Policy, Then Perhaps the Policy Can Be Converted and Sold as a Life Settlement
Term life insurance policies typically have a set period during which the premiums are level, after which the premiums can increase dramatically. Once the level premium period ends, clients are often faced with significantly higher premiums that can make it difficult to maintain the coverage.
In some cases, it may be possible to convert a term policy to a permanent one or a universal life policy before the level premium period ends. However, if a client no longer needs or wants the coverage, a life settlement might be a better alternative. Even a term life insurance policy that has reached its conversion deadline could potentially be sold through a life settlement, depending on the client’s age and health.
Why This Matters for Advisors:
For clients nearing the end of the level premium period on a term life insurance policy, conversion to a permanent policy or a life settlement should be considered. It is important to assess whether the policy still meets the client’s needs and whether a life settlement could be a more advantageous solution.
5. Beneficiaries (i.e., Kids) Are Doing Well and the Policy Is No Longer Needed
Many people purchase life insurance policies to provide for loved ones in the event of their death. For parents, the primary goal is often to ensure that children or other dependents are financially supported if something were to happen to them. However, as children grow older, become financially independent, and establish their own careers, the need for the life insurance policy may decrease or even disappear altogether.
If your client’s beneficiaries are doing well financially and no longer rely on the life insurance policy for financial support, then the policy may no longer serve its intended purpose. In this case, selling the policy through a life settlement could allow your client to access the cash value of the policy while still alive.
Why This Matters for Advisors:
Advisors should regularly check in with clients regarding their life insurance needs. If beneficiaries are financially secure, the policy may be surplus, and it might be time to explore a life settlement as an alternative.
6. The Beneficiary Dies (i.e., a Spouse) and Therefore the Death Benefit Is No Longer Needed
Another scenario that may warrant a life settlement is when a policyholder’s primary beneficiary, such as a spouse, passes away. In this case, the policyholder may no longer need the policy’s death benefit, especially if they don’t have other dependents or family members to provide for.
While the policy may still have value, the need for it has been diminished significantly. Selling the policy through a life settlement allows the policyholder to access the cash value now rather than holding onto the policy for a benefit that may no longer be necessary.
Why This Matters for Advisors:
After a beneficiary’s death, it is important to reassess the purpose of the policy. If the policy is no longer necessary, a life settlement could provide a better financial option.
7. Key Man or Buy-Sell Agreement Policies Are No Longer Needed
Businesses often purchase life insurance policies on key executives (key man insurance) or as part of a buy-sell agreement to ensure that the business can continue operating in the event of a partner’s death. However, these types of policies may become redundant if the business undergoes significant changes, such as the departure of a key employee or a shift in business structure.
If your client is involved in a business where a key man or buy-sell agreement policy is no longer needed, a life settlement could be an excellent way to extract value from the policy. These policies can be sold to a third-party purchaser, and the proceeds can be used for other business needs or personal expenses.
Why This Matters for Advisors:
Key man and buy-sell policies are often overlooked in financial planning, but they can be valuable assets. If these policies are no longer needed, they could be sold as part of a life settlement, providing both personal and business financial benefits.
8. Need Cash for Medical Expenses
One of the most pressing reasons individuals consider a life settlement is the need for cash to cover medical expenses. As individuals age, medical costs often rise, and health insurance may not cover all expenses, particularly long-term care or specialized treatments. In some cases, the life settlement can provide the necessary funds to cover these expenses.
By selling an unwanted life insurance policy, clients can access a lump sum that can be used to pay for their medical bills, without needing to deplete retirement savings or other financial resources.
Why This Matters for Advisors:
Advisors should discuss the option of a life settlement with clients who are facing significant medical costs, particularly when traditional sources of funding are insufficient.
9. High Net Worth (HNW) Clients Have Too Much Life Insurance and Can Sell Some Policies to Relieve the Premium Burden
High-net-worth individuals (HNWIs) often purchase multiple life insurance policies as part of their estate planning strategy. However, as their financial circumstances change, they may find that they have more life insurance coverage than they actually need. In these cases, the premium payments on excess policies can become burdensome.
For HNWIs, a life settlement can help relieve the financial strain caused by excess life insurance. By selling unneeded policies, they can reduce their premium obligations while generating cash that can be reinvested elsewhere.
Why This Matters for Advisors:
For HNW clients, it is crucial to periodically assess their life insurance coverage. A life settlement could be a solution to help them manage their overall financial plan more effectively.
Conclusion
Advisors play a key role in helping clients navigate important financial decisions, including whether a life settlement is the right solution. By recognizing the indicators that suggest a life settlement might be the best option—such as excessive premium payments, an unnecessary death benefit, or the need for liquidity—advisors can provide invaluable guidance that helps clients optimize the value of their life insurance policies.
Understanding life settlements is critical for advisors, especially as clients approach retirement or face life changes that impact their financial needs. Through careful consideration of these key indicators, you can help your clients make informed decisions that align with their overall financial goals and ensure that their life insurance policies serve them well.