Life settlements — the sale of a life insurance policy for significantly more than if the policy is simply lapsed or surrendered – may not be widely known, but they are an important tool for financial advisors when helping senior clients and are becoming more well-known and recommended by financial professionals.
A life settlement makes sense for seniors who — after years of premium payments – are faced with the lapse or surrender of that policy. It could be that the policy’s cash value has been depleted and the premiums are too high, the needs for the policy have changed, or the senior and their family need money in retirement.
(Related: Solving the Mystery of Term Life Settlements)
When discussing life settlements with a senior client, their adult children are often involved. Adult children are not only providing physical and emotional support, they are also providing financial support.
The following are three pieces of advice for engaging with the adult child of a senior client who is thinking about a life settlement.
1. Discussing Whether to Keep a Life Insurance Policy
Children often know very little about their parent’s finances. This includes whether their parents own life insurance policies.
A surprising reality about life insurance is that few policies pay death benefits to beneficiaries. Many policies are terminated before the death of the insured person under the policy. In fact, only 7.5% of all terminated policies in 2018 paid a death benefit to beneficiaries, according to the American Council of Life Insurers. The remaining 92.5% of policies were lapsed or surrendered.
This is why it’s crucial to advise adult children to ask their parents about what, if any, life insurance policies they may have and help them determine if the policy is still affordable. Are the premiums on the policy becoming too costly, or are the costs of living in retirement – including escalating senior health care costs — making on-going premium payments a challenge?
An advisor can help the client and adult children by helping them find out important details about that policy, including what the current and future premiums are, when the next premium is due, if the policy has a cash surrender value and if it’s a term policy that can be converted to a permanent policy.
2. Focusing on What’s the Best Use of the Policy for the Senior Client
Unfortunately, I’ve seen cases where an adult child who is helping their parents with their finances is thinking more about possibly receiving the death benefit than about the immediate living needs of their parents. This is obviously a sensitive matter and can be even more complicated when there are multiple children as beneficiaries or when an adult child financially supporting their parents is facing their own financial pressures.
Despite obvious tensions that can arise between parents and children and/or among the children, the advisor should remember that they represent their senior client and, in some cases, owe a fiduciary duty and responsibility to act in their client’s best interests. A life settlement converts an ever-costly policy into funds an aging senior can use for the cost of living, health care bills or long-term care costs.
Advisors can explain to adult children that the policy is their parents’ asset that should be used for their parents’ benefit. These resources can not only reduce a burden on children who provide financial support to their parents, there are situations where children who are providing physical care for their parents can be compensated for their time and commitment.
3. The Importance of Obtaining a Policy Appraisal
No matter the circumstances, it’s good practice for seniors who own a life policy to obtain a policy appraisal. Like finding a valuable painting in your attic and getting it appraised, a life policy can be appraised for its current market value. Knowing how much a policy may be worth will help the advisor and client decide whether to keep or sell the policy.
Life policies sold via a life settlement are sometimes as valuable as the equity in a home. The results of a policy appraisal can mean that the policy was one of the smartest investments the senior client ever made. Alternatively, it could be one of the most expensive underperforming assets they have and not worth maintaining.
But short of getting an appraisal through a life settlement company, they’ll never know. That doesn’t mean the owner has to sell the policy. However, an appraisal will provide additional knowledge for all involved to consider as part of a wide-ranging financial snapshot.
An advisor can provide a great service by simply suggesting to the client and adult children that the policy be appraised. The appraisal is not cumbersome but does involve obtaining some health information about the insured person under the policy (usually the senior client) and information about the policy itself. The children can help by encouraging their parent to get an appraisal and helping collect this information.
Why Life Settlements Make Sense for Parents and Adult Children
Helping a senior client meet retirement and health care needs with an asset that has as much value as a home can make a tremendous positive difference in the life of the client. For most seniors with life insurance, the option of a life settlement is one of the most valuable tools available to a financial advisor.
Although life settlements help the senior policyowner, they can also benefit an adult child as well, who may be dipping into their own financial resources to pay the premiums or health care bills of the aging parent. While focusing on their senior client, advisors can help their client by being a resource to the adult children as well by providing them with information and advice on having a policy appraised and how to best use the money from a life settlement for their parent’s retirement needs.
Anne Long is senior vice president of business development at Lighthouse Life, headquartered in Conshohocken, Pennsylvania.