Asking financial advisors if they would ever advise clients to sell their life insurance policies can draw out some interesting responses.
Some see settlements as the right choice for certain clients.
Milton Vaughn Bauguess, president and CEO, Republic Asset Management Corp., Tallahassee, Fla., recently used a settlement to help a 71-year-old client stay insured.
The client had seen his estate shrink after his real estate holdings slumped in the dismal housing market. The floundering client sought to dump $1 million in permanent life coverage so he wouldn’t have to pay the high premiums, Bauguess says.
Bauguess found that a group of buyers who would buy the client a $400,000 paid-up policy while taking over the $1 million policy and paying the premiums.
But many advisors are unconvinced life settlements are a great product. Among them is Michael Goss, Michael Goss & Assoc., Overland Park, Kan. He says he has not yet seen a case where a client would be well served by selling a policy.
“Most of my clients need their insurance,” says Goss, who specializes in selling life policies to businesses, such as key-person insurance.
Once a client retires from the business, the person will take over paying premiums on the policy rather than sell it, he says.
Robert Cusick, owner of Investment Insight Ltd., Cortlandt Manor, N.Y., says the settlement business is tainted by too many bad actors. Cusick says he has had clients approached by so-called financial advisors asking them to buy life insurance just to turn around and sell it.
The advisors invited seniors to seminars about life settlements, and then followed up with phone calls asking participants in the seminar to buy life insurance, while offering to pay the premiums, he indicates.
In fact, when he checked the names of individuals running the questionable seminars, he says he could find no evidence they were registered to sell life insurance or investments.
“This is criminal behavior,” Cusick observes.
“If legitimate, viatical settlements can make sense,” Cusick says, although he adds that he has never found occasion to recommend one.
“The circumstances for the client would have to be that the person needed cash soon for living purposes,” he says. “But there are few circumstances where taking a tax-free death benefit out of beneficiaries’ hands would be advisable.”
The advantages of life settlements are “highly suspect,” agrees Robert Kuehl, a certified financial planner and vice president of H.C. Denison Co., Sheboygan, Wisc.
“A person buys life insurance for the death benefit,” he says, but that is lost once the policy is sold.
“Can a settlement work?” Kuehl asks. “Yeah, you can probably come up with examples that would make sense. But by and large, a settlement would not be useful compared to alternatives that might be available that would not lose the value of death benefit.”
Kuehl prefers to tell clients who wish to shed their policies to convert the cash value to an annuity, using a 1035 exchange. The advisor should also check to see whether the policy has an accelerated death benefit rider, enabling an owner r in declining health to tap it for care expenditures.
“You might also transfer the policy to a trust and have the children pick up the premium,” he says.
“I’m sure there are high-end techniques that can be used with life settlements. But you are getting someone who is hard up and thinks it’s only thing they can do.”
Because the broker who is selling a settlement is going to make a big commission and the company that is selling is going to make huge a profit, it is not in their interest to help the individual explore other alternatives, Kuehl argues.
“Anything that’s esoteric like this, I’d stay away,” he adds.
For similar reasons, he also cautions clients against buying variable annuities and equity indexed annuities or other complicated products paying high commissions, because it’s too tempting to the average advisor to push products paying the most.
“The guy isn’t going to get objective,” Kuehl says. “He’s not going to get the family involved or get the client’s attorney and accountant in on the discussion like he’s supposed to. It’s a rip-off for the most part. What happened to objectivity, where you can look at [a financial product] honestly and say, ‘Let’s do it’?”