What Estate Planners & Fiduciaries Should Know about Life Settlements

October 16, 2017

One of the trends we are observing in the marketplace is the fact that more estate planners and fiduciaries are discovering life settlements to achieve client-centric outcomes.

As growing numbers of aging baby boomers turn to their advisors to help them achieve their retirement and estate planning objectives, many estate attorneys are faced with decisions regarding life insurance policies that are no longer relevant to estate plans created years ago.

Life settlements have steadily gained greater recognition as a vital financial planning tool.  But until recently, many professional advisors and fiduciaries were hesitant to recommend them. Some estate planning attorneys felt they needed to gain a more comprehensive understanding of the “inner workings” of what they viewed as a nascent industry with a still-maturing regulatory environment.

But that is no longer the case. As industry research firm Conning noted in a recent press release, state regulators are making efforts to increase awareness of life settlements among retirees, and the market conditions point towards growth in new life settlements.

More estate planners are embracing life settlements because as clients age, their needs change. An estate plan that was crafted five or ten years ago may not be relevant today.

Based on our experience in handling life settlement transactions that were spearheaded by estate planning attorneys, there are a handful of common case scenarios as discussed below that have shown how life settlements can be used to address estate planning challenges involving life insurance policies that are no longer needed.

  • Trust-Owned Life Insurance

Universal Life Insurance policies held in ILIT's may not be performing satisfactorily due to the sustained low interest rate environment. Premium payments for under performing policies may be draining investable capital from the estate and putting the client’s cash assets at risk. In many such instances, a life settlement is a viable solution.

  • Key Man Insurance for Retiring Business Owners & Executives

Small businesses purchase key man insurance to protect against unforeseen losses in the event of death or disability of a particular key employee.  Instead of dropping or lapsing the coverage when a key man retires, the preferred alternative would be to sell the policy and apply the proceeds to pay off company debt, add revenue to the company, or transfer ownership to the key executive as part of his/her severance or retirement package.

  • Insurance Purchased for Estate Taxes

In light of the higher tax exemption amounts set by the 2012 passage of the American Taxpayer Relief Act (ATRA), many life insurance policies that were purchased for estate tax purposes are now obsolete. The cash proceeds from a life settlement can be used for new investments or to help pay for quality long term care.

  • Bankruptcy

Bankruptcy trustees are discovering the role of life settlements in bankruptcy proceedings as more professional advisors deploy this method to monetize assets to pay creditors. According to Bloomberg BNA, Title 11, Section 363 of the U. S. Code provides the authority for the secondary market sale of life insurance in order to maximize recovery for an estate and its creditors

  • Divorce

As clients go through divorce, estate attorneys must address the disposition of life insurance that had originally been purchased as income protection for the spouse. Proceeds from a life settlement are often used when marital assets are divided.

Why the secondary market for life insurance makes sense

For nearly 20 years, the secondary market for life insurance has been an option for policy sellers seeking to optimize the cash value of unwanted life insurance policies. Over the past five years, the market has seen a resurgence, and according to the Life Insurance Settlement Association (LISA), the future of the industry never looked brighter.

The market’s growth is due to a number of factors, including a more stable regulatory environment that protects consumers, and the infusion of investment capital from major financial institutions who are attracted to its non-correlated asset class. The increase in capital investment has given secondary market providers (those who acquire policies on behalf of portfolio investors) greater purchasing power for policy acquisitions. This is good news for senior consumers looking to sell policies for the highest possible value, often referred to as the policy’s “highest market value.”

In terms of the regulatory environment, 42 states now regulate life settlements. To further protect consumers, a handful of states have recently enacted life settlement disclosure laws requiring that policy owners be made aware of life settlements as a possible alternative to lapse or surrender. Federal and state government agencies have begun to recommend life settlements as a solution to pay for long term care expenses or to offset public funds used for Medicaid nursing home care.

In short, the secondary market continues to gain traction because it benefits consumers seeking to monetize a static insurance asset, as well as investors seeking returns not tied to the volatility of the stock market.

If you have questions about how life settlements can help your clients, call us at 1-855-768-9085 to discuss your case and to request an immediate policy analysis.