“Complimentary appraisal,” “free valuation,” and “no-cost estimate” are offers used in advertisements and websites by many life settlement providers and brokers to encourage life settlement inquiries.
A life settlement appraisal of a life insurance policy can provide valuable information for financial planning purposes and, also, for tax reasons. However, complete reliance on these estimates for either of these functions can be misguided.
In most instances, for tax purposes, these informal estimates provided by brokers and providers will not satisfy the IRS standards of what qualifies as a valid appraisal.
For financial planning purposes, a life settlement appraisal can be equally insufficient, as it only provides a guide as to what a policy might be worth on the life settlement market. And, in the case of a provider’s valuation, it may well be just an estimate of what the individual provider is willing to offer rather than a look at the market as a whole.
Typical appraisals estimate only what a policy’s life settlement value might be, but life settlement value and cash surrender value are not the only way to measure a policy’s worth. These estimates completely disregard the potential value of the life insurance policy death proceeds to the beneficiaries, which can be much greater. A complete appraisal of a policy’s value should not be limited to only what a policy might sell for on the life settlement market.
These appraisals are being used by life settlement providers and brokers as a marketing tool to create interest in doing a life settlement. But as financial advisors, we need to do what’s best for the client and that means doing an analysis that is more comprehensive than just a life settlement appraisal. While “a bird in the hand is worth two in the bush” might be enticing to a client, it can be a short-sighted mistake.
There are many valid reasons for doing a life settlement:
- When a policy is no longer needed.
- When a policy is no longer affordable.
- When an immediate financial need must be dealt with, such as medical related expenses.
However, making a quick buck should not be one of them!