Life Insurance Valuation: A New Tool For Advisors
by Michael L. Coben
Your client is retiring and considering a change in life insurance. His policy carries a sizeable cash value. Time to surrender, right? Not so fast. Somebody else may be willing to pay more for the policymuch more.
One of the pillars of sound financial planning is the regular appraisal of a clients real estate, businesses, equities and other holdings. Historically, life insurance policies have been excluded from such evaluations because there was no market for them. But times have changed. The rise of the secondary market for life insurance has given policy owners access to what consumers in virtually every other sector have long enjoyedfair market value.
To market, to market
As a result, financial advisors are rethinking their approach to managing a clients life insurance assets. Instead of surrendering or lapsing a policy that is underperforming or no longer needed, advisors are taking clients policies to market to determine what they are worth.
The result is often a win for all parties involved. Take the example of a client who purchased a $3 million term policy several years earlier to cover a business loan for his company. Due to a change in his health, the business was sold and the loan repaid. But what to do with the term coverage? Normally, the policy would be allowed to lapse. Instead, the clients advisor suggested a valuation which yielded an offer of $930,000 on the secondary market.
Over the past few years, life settlementsas these transactions are knownhave moved into the mainstream of financial planning. They offer qualifying policy owners the opportunity to sell policies that are no longer meeting expectations or simply no longer needed and receive significantly more than cash value in return. According to Conning and Company, 20% of all insureds over the age of 65 own policies with a market value exceeding surrender value.
But policy valuation does more than identify the best price for unneeded or underperforming life insurance. It gives consumers new power to make financial planning decisions. Consider the case of a 74-year-old female with a $10 million term policy. The annual premiums in excess of $300,000 no longer fit her financial plan so she planned to let the policy lapse. The advisor suggested an appraisal, which yielded two options: a $660,000 life settlement or a $3.5 million Settlement With a Paid-up Policy (SWAPP). Instead of surrendering the policy for no value, the client chose the paid-up policy, eliminating her premium payments while addressing her estate planning needs.