Do Life Settlement Clients Need to Sell the Whole Policy?

This question comes up often and is the result of one of the misperceptions that many advisors have about life insurance settlements.

This answer to this question is: No!

To be clear, in many circumstances, clients may want to sell their entire policies, and, in most circumstances, this works well, because the client no longer wants, no longer needs or can no longer afford the policy.

But what if your client wants some death benefits?

There are some circumstances where clients do not need to sell the entire death benefit.

Convertible term policies

Selling term policies is very common, and it sometimes surprises advisors that term life policies can be sold.

Most of the time, to be marketable, the term policy must be convertible to a permanent policy and not past the conversion deadline.

If this is the case with your client’s policy, the policy can be highly marketable.

In this circumstance, your client can keep part of the policy as term, or convert part of the policy for themselves, and sell the balance.

Example 1: A recent client had a $1.25 million convertible term policy that was approaching the end of the policy, and the conversion deadline.

He sold his business, so he did not need that much coverage. He chose to convert $250,000 to keep for his family.

The other $1 million would go away at the end of the term, and he would receive nothing.

The policy was marketed, and the client received $60,000 for the policy.

This scenario was a win-win for him, as he was able to keep some coverage for his family and receive some money for something that he was going to walk away from with zero.

Example 2: Another recent client had a similar situation to the example above, but with a different motivation and outcome.

Like the client above, there was a $1.25 million convertible term policy. The client retired and decided he did not need all of the coverage. The premiums were beginning to be a drain on his budget.

The term policy had another three years left on the level term period, but the conversion deadline was approaching.

In this case, the client did not convert $250,000.

He chose to keep the $250,000 as a term policy for the remaining three years, so there was some coverage just in case, but sell the $1 million balance.

He netted $15,000 because his life expectancy was longer than the client above, and the conversion premiums were higher.

The bottom line: Look at the conversion deadlines of your clients’ policies to see if they wish to keep or convert the policy.

If your client wants to keep only a part of a policy, a life settlement can be a good solution to bring your client more money than walking away with zero.

Retained Death Benefit

Through a retained death benefit, or RDB, the entire policy is sold, but the buyer retains a death benefit for the client’s beneficiaries.