By Brendan Flatow
Life insurance is a critical component of estate planning that provides tax-free death benefits to beneficiaries upon the policyholder’s passing. However, as clients’ circumstances and needs evolve, their life insurance policies may no longer be the most effective solution for their estate planning objectives.
For instance, let’s consider the example of a 79-year-old man who purchased a $4.5 million universal life policy for estate planning purposes. The change in the estate tax exemption and proper planning rendered the trust-owned policy unnecessary. The man was prepared to lapse the policy, which had no surrender value, but his advisor advised him to treat the policy like any other asset in his portfolio and seek fair market value before acting. This led to the discovery of $1,660,000 of additional value, which was used to balance his estate plan.
According to the Life Insurance Settlement Association (LISA), 92% of life insurance policies in the US never result in a claim, and a vast majority of those policies are surrendered or lapsed, rather than sold. In an average year, that equates to more than 500,000 policies insuring seniors, totaling over $120 billion in death benefit. However, in 2021, policy owners received, on average, 7.8 times more for selling their policies than if they were surrendered.
Another study identified that 90% of seniors who surrendered a policy would have preferred to have been informed that a life settlement was an option. These statistics indicate that many seniors are not aware of all the options available to them when their life insurance policies no longer meet their needs or goals.
Estate planners, attorneys, trust officers, and legacy planners can help clients explore alternatives to lapsing or surrendering their life insurance policies, such as life settlements. A life settlement enables a client to sell their life insurance policy for a lump sum that exceeds the policy’s cash surrender value. This can provide liquidity to address changing financial needs or goals, such as paying for long-term care expenses or funding existing retirement strategies.
Additionally, a life settlement can be an excellent option when a client’s beneficiaries no longer require the life insurance coverage, or the client wants to use the proceeds for a different purpose. For example, a client may want to donate the proceeds to a charitable organization, make gifts to their grandchildren, or invest in a different asset class.
For example, a 74 year old insured recently sold his $1 million dollar universal policy after exploring the idea of surrendering the policy. He wanted access to the cash value with the goal of taking advantage of an investment opportunity created by the current interest rate environment. The sale provided him with $175,000 more to invest than if he had simply surrendered the policy. It is crucial for estate planners to educate their clients about their options and help them make informed decisions about their life insurance policies as part of their overall estate planning strategy. By understanding all the uses of life insurance in estate planning and how life settlements can be a good option when clients’ needs change, estate planners can provide the best advice and guidance to their clients.
