If you are a financial advisor or insurance professional, your clients often turn to you to for guidance on matters relating to their life insurance coverage. Chances are you have many existing clients to whom you sold policies years ago for income protection or for business purposes.

But as client age, family dynamics change. Expensive life insurance policies that were purchased while the client’s children were still at home or in college may no longer be needed. Or a key man policy purchased as part of a buy-sell agreement may no longer be relevant when the key person decides to retire and sell the business.

When clients experience major lifestyle changes that make the current life insurance coverage obsolete, financial advisors have a duty to recommend the most suitable solution to optimize their insurance asset. (Click here for an actual case example involving a life settlement for a life insurance package valued at $11.6 million.)

Unwinding life insurance policies that are no longer needed can be challenging, especially when it involves policies with low cash surrender value and expensive premium payments that may be draining the cash assets from the client’s estate.

While surrendering the policy for its cash value may be the first thought, the cash surrender value is typically only a fraction of what your client could receive for selling the policy in the secondary market.

Allowing an unwanted policy to lapse should be avoided at all costs. But industry data confirms that many seniors choose this option simply because they want an immediate exit strategy from expensive premium payments.

Each year, more than $100 billion face value of life insurance lapses by seniors over the age of 65, according to the Life Insurance Settlement Association. Most policy owners were not aware that a life settlement could have been an option.

As experienced secondary market advisors and brokers, the team at Asset Life Settlements helps advisors explore all possible solutions available to your client, such as selling the policy in the secondary market in order to:

  1. Obtain a cash settlement far greater than the cash surrender value
  2. Reduce coverage by retaining a portion of the death benefit
  3. Obtaining a combination of cash proceeds and a retained death benefit

Financial advisors have a duty to offer creative design solutions, coordinate and collaborate with the client’s other professional advisors, and become the catalyst for helping the client achieve their financial and retirement goals. (Click here for an actual case example of how a financial advisor deployed best practices and worked with other members of the client’s estate planning team to sell the client’s policy is in the secondary market.

Estate Planning Attorneys

Life insurance is often the cornerstone of an estate plan. But as clients reach their retirement years, large life insurance policies often become irrelevant. That’s why many estate attorneys and fiduciaries are incorporating life settlements as a strategic solution for insurance coverage no longer needed to achieve the client’s legacy planning objectives. The scenarios below illustrate opportunities where a life settlement might be the most advantageous solution for the client:

  • Trust-Owned Life Insurance: Universal Life Insurance policies held in ILITS 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. (Click here to read our blog titled “What Professional Advisors Should Know About Trust-Owned Life Insurance.”)

  • 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 2017 Tax Cuts & Jobs Act which doubled the estate tax exemption to $11.2 million per individual ($22.4 million for couples), 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. (Click here for explanation of the new (more favorable) tax implications for life settlements as provided by the 2017 Tax Act.)
  • 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 and family 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.

CPA's & TAX ADVISORS

Many CPA's and tax advisors are embracing life settlements as a smart choice for life insurance policies that have reached the end of their life cycle. (Read our blog titled “Fiduciary Duty: Three Reasons to Include a Life Settlement Needs Analysis in your Advisory Services Menu.”

As a tax planner or estate advisor with a fiduciary duty to your high net worth clients or business owners, you’ll want to explore how life settlements for obsolete policies can often be the most financially sound and prudent course of action. Life Settlements can help business clients convert a capital asset into immediate cash.

Liquidity for Retiring Business Owners: Life insurance policies are often used to fund a qualified pension or non-qualified retirement plan, such as a 412(i) plan, or a deferred compensation plan. Aging business owners who are seeking to sell their businesses and retire may have an option to turn illiquid assets (such as life insurance policies used to fund retirement plans) into immediate cash.

Leveraging Corporate-Owned Policies: Accountants and CFO's should explore the opportunity to leverage a company’s balance sheet by freeing-up capital trapped in corporate owned policies (and key-person policies) that are no longer needed for business purposes. The proceeds from a life settlement can be used to pay off company loans, free up funds for capital investment, or create a severance package for a departing key person.

  • New Tool for Bankruptcy Trustees: The role of life settlements in bankruptcy proceedings is becoming more common as professional advisors deploy this method to monetize assets to pay creditors. According to Bloomberg BNA (publisher of legal and tax information for professional advisors), 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.

BUSINESS VALUATION APPRAISERS

With the improving economy, the number of business start-ups, scale-ups, and cash-outs is increasing. As a result, expertly qualified business valuation appraisers are in growing demand by law, accounting and other corporate advising firms. 

As Asset Life Settlements previously noted, the improving economy and financial performance of small businesses is the driving force behind the recent spike in the sale of small businesses by aging executives and business owners. Business appraisers typically use a combination of several valuation methods to arrive at a fair market value in terms of the business’ asking price, but the current economic environment presents an opportunity for business appraisers to go a step beyond their normal appraisal methods and explore whether key man life insurance assets can be monetized and leveraged for the benefit of the departing owner.

Many business valuation practitioners who specialize in transaction based mergers, acquisitions, divestitures, buy-sell agreements, leveraged buyouts, insolvency and bankruptcy, debt and equity financing and other business proceedings may not be aware of the pivotal role they can play as it relates to spotting the asset optimization potential of life settlements for obsolete key man policies. Most key man policies were purchased to fund buy-sell agreements and as a mechanism to protect against business succession risks.  If a covered business owner dies, the key man life insurance policy can guarantee that the liquid funds will be available to fulfill the terms of the agreement. But what happens when the key man decides to retire or sell the business and the policy is not longer relevant? Surrendering the policy or allowing it to lapse could leave huge sums of money on the table if the insured qualified for a life settlement.

The secondary market for life insurance policies should be on the radar screen for all business valuation professionals. The nexus between business valuation and life settlements for obsolete key man life insurance policies is quite clear. Rather than allow the key man policy to lapse, business valuation practitioners should contact Asset Life Settlements or consult with the company’s insurance advisor to determine whether the proceeds from a life settlement could increase the asset value of the business.  The retiring key man may also want to negotiate using the proceeds from the life settlement as part of the severance package or to purchase additional company shares.
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