From the October 2009 Issue of Senior Market Advisor Magazine

Sometimes clients no longer need their life insurance policies or can no longer afford to continue them, especially as they recover from the economic crisis. When this occurs, clients are able to return the policy to the insurance company that issued it and receive cash for its current value–called a cash surrender value–assuming the policy has value. In the event that the clients are no longer able to afford their life insurance policy, and it does not have any cash value, they would simply let the policy lapse.

A new phenomenon

Those within the industry may have noticed a growing phenomenon in the life settlements business within the last five years. During this time, a relatively new market called secondary life insurance has grown, which enables life insurance policy owners who no longer need their policies to sell them on the open market, much like a homeowner would sell real estate. Life settlements can offer legitimate value to policyholders and investors, and enhance the value and liquidity of life insurance policies. If this process is completed properly, the life insurance policy would typically earn significantly more in the open market than it would if returned to the insurance company for a cash surrender value.

Keep the policy in effect
Financial advisors who currently have senior clients struggling to afford their life insurance premiums are encouraged to determine ways to continue the policy. Keeping the policy will continue to provide clients with the peace of mind that comes from knowing a tax-free death benefit will be available for their family and loved ones.

If a client is truly unable to continue the policy, it is important to note that returning the life insurance policy to the insurance company is not necessarily in the client’s best interest. Instead, a professional and ethical procedure for offering the policy as a life settlement option could provide far more cash value for the policy owner. If this is the case, the life settlement process should include an unbiased offer from at least three separate settlement companies and should be approved by the advisor’s broker/dealer.

An unregulated business
While the market for investing in life settlements has grown tenfold to nearly $20 billion, and despite the fact that life settlements can offer legitimate value to investors and policyholders, the industry remains largely unregulated. As trusted advisors, it is important to educate clients on the current conditions of the life settlements market and to always keep their best interests top of mind while conducting these transactions.