More than 100 years ago, in its landmark Grigsby v. Russell decision, the U.S. Supreme Court ruled that life insurance is personal property and can be bought and sold like any other property you own. That means your client’s life insurance policy has value to his or her family right now, not just when he or she passes away. Unfortunately, the vast majority of your clients are unaware of this simple fact.
The problem arises when the policy owner concludes they just can’t afford those premiums anymore, perhaps because they’re now in their retirement years and living on a fixed income. Or maybe they decide they just don’t need the death benefit anymore now that their kids are grown, have steady jobs and built families of their own.
So, in the absence of knowledge about any other alternatives, most policy owners in that situation just lapse or surrender the policy back to the insurance company, accepting whatever small amount of cash surrender value is available.
Research available to the Life Insurance Settlement Association indicates that more than 710,000 policies are lapsed or surrendered each year — with a combined face value of more than $57 billion — by American seniors over the age of 70.
It’s important that advisors exercise their trusted voices with clients who have decided to lapse or surrender a life insurance policy. You need to speak up and inform them of their options; in fact, many advisors to whom we’ve spoken with industry conferences have said they feel it’s their fiduciary responsibility to make their clients aware of alternatives to lapsing or surrendering a policy.
But aside from the fiduciary issue, there is a common-sense test: if a client could lapse a policy for its nominal cash surrender value of $20,000 or they could sell that same policy to an investor for $150,000, shouldn’t they be entitled to this information?
So, if a client has decided they no longer need or can afford a life insurance policy, what are the alternatives to lapsing the policy and surrendering it back to the insurance company?