Life settlements are growing in popularity, even as financial advisors and insurance brokers are reluctant to discuss these transactions with their clients. That reluctance, however, is problematic — particularly if you are in a fiduciary role. Because life settlements can generate substantially more cash for the policyholder than a surrender or lapse of the insurance, not presenting the life settlement as an option could constitute a breach of fiduciary duty.
A 2014 lawsuit, Larry Grill, et al. v. Lincoln National Life Insurance Co., hinged on this very concept. The plaintiffs claimed fraudulent concealment and financial abuse of an elder, because their broker failed to inform them that they could sell their insurance in a life settlement. The couple had purchased $7 million in life coverage and, despite 10 years of sizable premium payments, the policy was not generating sufficient investment returns to cover their cost-of-insurance charges. When the Grills asked their broker for options, the broker advised that they could pay more in premiums or reduce their coverage. They subsequently surrendered more than $5 million of their life insurance. After learning that they could have sold their policy in a life settlement for cash, the couple filed suit.
Though the case was eventually settled, the courts did confirm that failure to disclose the life settlement option could result in financial harm to both policyholders and beneficiaries.
What does all this mean for you? If you are a fiduciary advisor, it’s critical to understand how life settlements work and be able to recognize the situations where one may be fruitful for your client.
1. Clients can benefit from understanding the value of their life insurance asset.
Fiduciary duty doesn’t require you to educate every one of your clients about the secondary life insurance market. But in situations where clients are already considering a reduction or restructure of their life insurance, the life settlement conversation is warranted.
Clients who are over-insured, burdened by high premium payments, or facing a liquidity shortfall may view the cancellation of their life insurance, particularly high-dollar policies, as a quick source of financial relief. If they surrender the policy back to the insurer, they will receive the policy’s cash surrender value. They’ll also no longer be responsible for the premium payments. Those are both good things for someone who’s struggling financially.
The thing is, a life settlement also accomplishes those outcomes — while generating more cash for the policyholder in the process. A typical selling price in a life settlement would be 20% to 30% of the policy’s face value, though some policies are worth up to 60% of face value.
Here are some questions to consider. Would your client benefit from knowing the market value of his or her life insurance? Is that value an important reference point for making an informed decision about surrendering the policy or keeping it in force? Does your client have excess life insurance? Is your client looking for financial restructure strategies due to solvency concerns? If any one answer is yes, then it may be time to discuss life settlements with that client.