By Jonah Kahn
Life insurance is a powerful and necessary planning tool. When purchased, the hope is that it will provide financial stability when it’s needed the most. This is true for families, as well as businesses; but over time, financial priorities change.
Policies should be reviewed like other assets to proactively evaluate the need and performance of the policies. A well performing and needed policy should be properly maintained. However, what if the opposite is true, and its initial purpose has changed or diminished?
Each year a decision is made to lapse or surrender an estimated 500,000 policies, totaling over $120 billion of death benefit, on senior insureds. Even with the best designed plans, they may no longer meet expectations, fail to properly perform, or simply become unneeded. As dynamics change, these policies can also be welcome sources of liquidity.
During a recent portfolio review, an advisor discussed his 71 year old client’s $1,000,000 universal life policy. The premium had become a burden after the policy underperformed during a decade of low interest rates. Without a clear need, a decision was made not to keep the policy. The cash surrender value had dwindled to $0. The policy was worth $290,000 as a life settlement and the choice was clear. The settlement transformed an unwanted and underperforming asset into a significant liquidity event. The sale proceeds, along with the reallocated premium dollars, allowed the policyowner to focus on his current priorities.
The growth of the life settlement market has empowered advisors to expand the solutions they can provide to senior clients. As a result, billions of dollars are available to fund existing strategies, pay for increasing long-term medical costs, and address more pressing financial needs.
