Feature: When are settlements right for clients?

“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’?”