Life Settlements: Some Tips For Financial Professionals

Through use of life settlement agreements, producers may be able to offer older clients and prospects (typically over age 65) an innovative alternative to surrendering unneeded or cost-prohibitive life insurance policies.

This alternative is: Sell it for cash.

Imagine presenting a five- or six-figure offer on a policy the client was about to surrender. For the right person, this can open up new opportunities to position assets optimally for the future.

Consider the realities: When an estate size has changed, a business has been sold, or intended beneficiaries are outlived, the purpose for which the client purchased the policy may no longer exist. Or, when a business owner or executive retires, the firms deferred compensation, key person, or buy-sell plan may have policies that are no longer appropriate.

As recently as five or six years ago, when such life changes occurred, life insurance did not always change with the client. The only alternative available was to let the policy lapse or to surrender it.

Today, by contrast, life settlement agreements can provide clients with a new way to unlock the value in their life insurance.

Here are some qualifiers:

  • To sell their policies this way, clients should typically be over age 65 and be the owner of an individual life policy (typically, having a face amount of $150,000 or more).
  • The clients policy must be assignable and outside the contestable period, whether individually owned or owned by trusts, foundations, not-for-profit organizations, or businesses.

(In general, an owner whose health has declined since the policy was issued will receive a greater life settlement offer than if little or no change has occurred.)

The actual purchase is a simple process, usually only requiring completion of a brief application and release forms. Typically there are no exams, paramedic visits, medical tests, or application fees.

Once the settlement has been completed and the policy has been transferred from seller to buyer, the client can use the money for any purpose. That enables the client to reposition assets in ways that support present and future needs.

Such agreements are not for everyone. For instance, many older clients still need their life insurance for the original or new financial purposes, and a policy in question may still be cost effective in relation to its purposes.

Also, the sale may have tax consequences that are detrimental to a particular client. There may be family members that do not want any changes made to existing contracts, regardless of the benefits, for reasons not always known to the financial professional.

Additionally, some clients just dont want anyone else holding a life insurance contract on their own life.

But the agreements can be highly effective in many other situations. For instance, for the right client, the funds generated by the sale can create opportunities to buy more appropriate insurance products for their current stage in life. These products might include annuities, long term care insurance, or survivorship life insurance.

Alternatively, the agreements may free up capital the client can use to fund other investments such as stocks, bonds, or mutual funds.

The agreements benefit the producer who facilitates them, too. First, when you show your senior clients a new way to find value in life insurance that is no longer needed or cost effective, this positions you as a creative problem-solver and professional.

In turn, that creates satisfied clients who generate referrals.

Finally, life settlements can represent significant financial benefits for the producer, whether compensated with commissions or in billable hours.

The key, for producers, is to become educated in what a life settlement is, how it works, and when it is an appropriate solution to recommend. It is an innovative and yet fairly easy to understand financial alternative, but you still need training in the finer points.

Also, be sure to work with a credible, institutionally backed life settlement company. Today, the number of companies in this market is growing, but not all offer the same credentials or services. You want to find a company that specializes in life settlement business, has the backing of a solid financial institution, and has a track record of sound business practices.

As a part of your due diligence when researching life settlement companies, take the time to check out several companies. Compare your findings, so you can help your client make an informed settlement decision.

Glen B. Forbes CLU, ChFC, RHU, REBC, FLMI, is principal of Forbes-Kennedy Consulting, an Elmhurst, Ill. niche marketing firm in insurance and financial services. He can be e-mailed at GB4BZ@aol.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 24, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.