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.