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March 16, 2003 at 07:00 PM
Be Sure To Give Clients The Life Settlement Option
By A. Mark Berlin Jr.
Although life insurance is intended as a safeguard against the unforeseen and an essential portfolio component, an unneeded or ineffective policy quickly can become a financial liability. If this occurs, a trusted advisor must be willing and adequately prepared to explore all potential options, including life settlements.
Here, I will examine situations when a life insurance policy may no longer be appropriate and discuss potential solutions, as well as how to determine if life settlements are suitable for both you and your client.
Unnecessary Policies And Necessary Solutions. Just as there are many varying circumstances that may determine that a life insurance policy is no longer useful, a whole host of innovative options exist to meet a clients changing financial needs.
Depending on multiple variables, including the clients particular motivation to divest himself of a policy, accelerated death benefits, loans and partial surrenders, 1035 exchanges, annuity transfers and nonforfeiture values all may be explored in addition to life settlements.
Prior to the emergence of the aforementioned options, when a life insurance policy was no longer needed or cost effective, typically there only were two choices–surrender the policy, or stop paying the premiums and eventually let it lapse. But now with the introduction of life settlements, which involves the sale of an existing life insurance policy by the owner to a third party, clients now have the choice of receiving a cash settlement.
Regardless of which option you ultimately pursue on behalf of your client, the following are some common examples of when a life insurance policy may have outlived its usefulness:
Changes in the estate requiring less insurance coverage, if any;
Premiums becoming cost prohibitive;
Outliving intended beneficiaries or the needs of the beneficiaries have changed;
Policy performance has not met expectations and will require increased premiums;
Level term policies where the level premium period is ending, causing rapid premium increases;
Buy-Sell funding where owners have retired or the business is sold;
Deferred compensation plans where the executive has left the company;
Key person policies where the insured has retired; and,
Policies that were purchased to cover loans that have since been paid off.
