By Steven Arenson and Robert G. Miller
Today, when you and your 65-plus-year-old client determine that the need for an in-force life insurance policy has changed or no longer exists, you have a dual opportunity: You can serve your clients best interests and provide yourself with new sales opportunities at the same time.
Depending on your clients circumstances, needs and goals, the most appropriate solution may be one of the following: make a cash- or partial-surrender of the policy; exercise nonforfeiture provisions; gift the policy; implement a 1035 exchange or annuity transfer; or arrange a life settlement.
When evaluating the best way to divest the policy, the life settlement approach should be considered. In fact, we believe you may have a duty, as the clients advisor, to consider it.
A life settlement is the sale of a life insurance policy by the policy owner to a third party. Using a proprietary formula, the third party or “provider” discounts the death benefit and makes a cash offer to the policy owner or “settler.”
Once the offer is accepted, the provider becomes the policy owner, beneficiary and premium payer, and receives the entire death benefit upon maturity. The settler has immediate and unrestricted use of the sale proceeds and the right to rescind the sale within a specified period of time.
Clients insurance needs are rarely static. Riders are added and canceled; face amounts and premiums can fluctuate over time; policies are replaced when appropriate; and due to a myriad of changing estate, business or personal reasons, policy surrender or lapse is an everyday industry occurrence.
Unfortunately, when surrendering and lapsing a life policy, many policy owners do not receive the policys fair market value. This is because the life settlement option was not explored.
Investors are persistent in discovering new ways to locate and extract previously undetected value in commonly held assets, and a vibrant secondary market for certain life insurance polices has evolved over the past five years.
In some cases, fair market value for an unwanted policy may not be what the issuing company says it is, but something much greater, as calculated by a provider.
Since many policies may not qualify for an offer or an offer that is better than the policys cash surrender value, insurance professionals should consider the following guidelines when assessing whether to pursue a life settlement option.