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What should an advisor do when a client's asset no longer fits in the client's portfolio, whether that asset is a stock, a bond, or even a piece of real estate? Advise the client to sell it, right?
The same should be true of a client's life insurance policy, but it's not.
Many advisors tell clients to let unwanted policies lapse or to surrender the policies. That's often bad advice.
Selling a life insurance policy through a life settlement is now a mainstream financial planning tool, but too many advisors hesitate to recommend policy sales because of misconceptions about how a life settlement works.
Here are four common misunderstandings that may keep an advisor from recommending a life settlement.
1. It's too risky for the clients.
A life settlement is a solution for a client only if the client is going to get rid of the policy. A life settlement is not a solution for a client who is keeping a policy.
A life settlement is simply a way for a client to receive more money than the client would have received through lapsing or surrendering a policy.
Last year, the value of the average life settlement was 6.5 times the size of the purchased policy's cash surrender value.
2. Clients need to be extremely ill to sell their policies.
Many advisors think the life settlement market still focuses on clients with extremely short life expectancies. The vast majority of the market does not.
If a client is extremely ill, there may be better options for that client than selling the policy.
The list of alternatives could include applying for accelerated death benefits or using critical illness benefits.
Many clients who use life settlements these days have life expectancies of about 10 to 15 years.
3. It's wrong for anyone other than the client to make money on a client's policy.
The reality is that someone is going to receive money from the client's policy, whether that be the beneficiary, the life insurance company, the buyer or the client.
If a policy is going to be lapsed or surrendered, the life insurance company is going to make the money, because of all of the premiums that have been paid in, with no claims being paid out.
When a client sells a policy through a life settlement, both the client and the buyer make money.
Without buyers, clients would be forced to walk away from their policies with little or nothing. Buyers serve an important function: Helping clients benefit from their policies.
4. The broker-dealer won't let a policy sale happen.
Life settlements have been legal since 1911. Both life settlement buyers and brokers are regulated by insurance departments in each state. If there is a broker-dealer preclusion, at least providing information about life settlements may be appropriate. FINRA offers a consumer guide, "What You Should Know About Life Settlements," that you can share with clients.
Lisa Rehburg is president of Rehburg Life Insurance Settlements, a life insurance settlements broker. She can be reached at 714-349-7981.
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