As a financial advisor, it’s not uncommon to hear clients who are nearing retirement wonder, “Is it better to retire or keep working?” Younger clients may ask things like, “What is the most important factor in retirement planning?” Retirement—and all the planning associated with it—comes with a lot of unknowns.
Clients often have mixed feelings about retirement, too. Of course, it’s an exciting time with limitless possibilities of traveling, spending time with family and friends, and exploring new hobbies. But financial worries are also quite common. While a retirement plan calculator and worksheet can help individuals think through the basics, financial advisors play a critical role in helping clients retire in peace and reap the benefits of retirement planning.
In this article, we’ve pulled together a few of the primary benefits associated with retirement planning to provide financial professionals with talking points and information to share with their clients and prospective clients. But first, we’ll discuss common retirement income sources, including the relatively unknown option of a life settlement, and how your clients may be able to benefit from this solution.
What Is Retirement Planning, and What Income Sources Contribute to It?
Retirement planning is, in essence, a way for individuals to establish their financial retirement goals and what they need to do to achieve them. For financial advisors, that might mean assisting with financial planning and education, wealth and investment management, tax planning, long-term care planning, and more. Of course, most financial advisors consider the more traditional sources of retirement income, such as:
- Guaranteed income, including Social Security and investment annuities
- Pension plans and defined employee benefit plans
- IRAs, including Traditional and Roth
- Retirement accounts, including 401(k), 403(b), and 457 plans
- Non-retirement savings accounts such as brokerage accounts or certificates of deposit (CDs)
However, there’s another important income stream that’s often overlooked: a life settlement.
What Is a Life Settlement?
A life settlement is the sale of an existing life insurance policy to a third-party investor. This is an especially important option for clients who no longer want or need their policy—or for those who are considering surrendering or lapsing it. In a life settlement, the original policyholder receives a one-time payment. And in return, the investor takes over paying the premiums and will receive the death benefit when the original policyholder dies.
How does a life settlement contribute to retirement? Because a life settlement provides a lump sum payment to the original policyholder—and they no longer have the burden of paying premiums—they are an effective way to assist elderly clients in increasing their retirement income. This is especially important for clients who may not have planned appropriately for retirement or have experienced unforeseen circumstances.
Another benefit is that the payout is often considerably higher than the surrender value. In fact, an average life settlement pays roughly 20% of the policy’s face value, while surrender values are often less than 10% of the death benefit, if anything at all. The one-time payment can be used for anything, including medical expenses, investments, or supplemental income.
Who Qualifies for a Life Settlement?
There are a few basic qualifications that a life insurance policyholder must meet in order to enter into a life settlement, including:
- Age: Policyholders must be at least 65 years old, although the ideal applicant is closer to 70 years old.
- Life Expectancy: In general, a policyholder should have a life expectancy of 15 years or less to qualify, and shorter life expectancies are often more attractive to investors.
- Health: Policyholders must have had a change to their health since their life insurance was issued.
- Policy Type: They must have a life insurance policy that can be sold. Convertible term life, universal life, whole life, and second to die are all eligible.
- Policy Size: A policy must have a minimum $100,000 death benefit to qualify for a life settlement, and higher benefits are preferred by investors.
The easiest way to find out if your client qualifies is for them to fill out a qualification calculator. At Life Settlement Advisors (LSA), we offer a free life settlement qualification calculator to help those interested in a life settlement understand if they may be eligible. At the bottom of this article we’ll share more information about the life settlement process and how our team can assist you and your clients. Now, let’s look at retirement planning benefits next.
What Is the Importance of Retirement Planning for Your Clients?
As a financial advisor, you likely already know the benefits of retirement planning include things like financial stability, more informed decision making, better preparation for the future, and so much more. Yet, for new clients or for those who have never worked with an advisor, the advantages may seem murky or unclear. We’ve compiled a list of five reasons why retirement planning is so important, as well as relevant facts and statistics, that you can share with new or prospective clients.
1. Understand How Much You Need to Retire Comfortably
What is the key to retirement planning? For most individuals, it’s understanding what they need to do to be able to retire comfortably, given their location, standard of living, debt, future expenses, and more. Yet, an alarmingly low 24% of Americans believe they’ll be able to reach $1 million in savings for retirement. And, the same article reports that 49% of Americans are concerned they’ll be unable to afford their desired lifestyle and 64% are concerned about higher-than-expected medical costs.
So, for many clients you may wish to start at square one by exploring questions like, “What is a good monthly retirement income?” and “How much do you need to comfortably support your lifestyle?” Educating them about the 80% rule or the 4% rule can provide a jumping off point for deeper conversations that are personalized to their situation and goals.
Of course, even the best plans may face issues like medical expenses or lower-than-expected savings. A life settlement can supplement more traditional retirement incomes should your client find themselves in need of additional money.
2. Make Smarter Financial Decisions
Every decision your client makes can have an impact on their financial stability, now and in the future. Things like changing jobs, starting a business, buying a new primary home or vacation home, or taking out Social Security benefits early are all factors affecting retirement planning. Proper planning can help individuals better contextualize how these things can and will impact their retirement so they can make the best decisions possible.
All of this is especially critical as Northwestern Mutual’s 2022 study reports that Americans believe they’ll need $1.25 million to retire comfortably, which is a 20% increase from 2021. Yet, the average retirement account in the US lost approximately 11% of value during the same time period, further underscoring the need for retirement planning.
For financial advisors working with elderly clients who have been impacted by these losses, a life settlement may be a prudent financial move to regain liquidity.
How do you know if your client may be a good candidate for a life settlement? Simply discuss their plans for their life insurance policy. If they still have a need for their life insurance policy, such as dependents, a life settlement may not be the right decision (although it is possible to sell a portion of a life insurance policy and retain a portion of the death benefit for a beneficiary).
But, if you find that your client feels that their premiums are too high, that their money may be better served elsewhere, or that they have immediate monetary needs, it may be in your client’s best interest to bring up the topic of life settlements.
3. Understand Other Potential Sources of Income
Financial planners can help their clients to understand and capitalize on other sources of retirement income. Selling a home, renting out an already owned vacation home, or capitalizing on a reverse mortgage are all viable options for clients with differing assets. As we’ve discussed, retirees who find themselves in need of additional retirement income may also be able to turn their life insurance policy into another source of retirement income or even an investment.
4. Understand Tax Burdens
Taxes are complicated, and this fact doesn’t change after retirement. Financial advisors are uniquely suited to help clients reduce the amount of taxes they’ll pay during retirement with strategies like tax diversification.
For example, one of the many benefits of early retirement planning is that those who have not reached their full earning potential can use Roth IRAs to take advantage of their lower tax bracket. Yet, one 2019 study found that only about a third of all Americans believe they’re knowledgeable about IRAs—a significant gap, and one that may have serious tax implications for these individuals as they retire.
Or, for those clients who are considering a life settlement, they will need to understand and prepare for how the offer they receive will be taxed, depending upon the offer amount and how much they’ve paid into premiums over the years.
5. Gain Peace of Mind
What is the most important thing in retirement? For most retirees, it’s being able to relax and have peace of mind in their life after retirement. Yet, over 75% of Americans say they feel anxious about their financial situation, with just over half of Americans reporting that they find it difficult to control their finance-related anxieties and worries.
With proper financial planning and the right financial decisions, you can help your clients find peace and comfort for their retirement years. For elderly clients who find themselves anxious about their finances in their final years, a life settlement can provide a way to ease those concerns and minimize financial stress.
What Is the Life Settlement Process?
Once your client has decided they are interested in pursuing a life settlement and you’ve completed the qualification calculator, the process is relatively straightforward, especially if you work with an experienced life settlement broker like LSA.
- Help Your Client Complete Their Application: Your client should be prepared to answer questions about their policy, personal information, medical history, lifestyle, family health history, and more. They will also need to submit a copy of their policy, their most recent annual statement, a policy illustration, and a copy of their trust (if the policy is owned by a trust). As a financial advisor, you should feel empowered to help your client complete this information, as the amount of money they receive will be based—in part—on the information they provide.
- Help Your Client Understand Their Options: Once an application is approved, it will enter the life settlement market. Offers will be made on their policy, and you and your life settlement broker can help your client understand their offers and determine which is the most profitable.
- Help Your Client Navigate the Sale: Once they accept an offer, they’ll need to review and sign closing documents. This will include the contract, disclosure documentation, insurance verification, a signed statement by their primary care physician indicating a sound state of mind, and a change of ownership form.
- Help Your Client Navigate Their Payment: Once your client receives their payout, they need to be prepared for the potential tax implications. Your role in this process is vital in ensuring your client understands what is required of them. Depending upon how they choose to spend their payout, they may also require assistance in investing their new money.
For clients who qualify, a life settlement provides an excellent opportunity to supplement their retirement income. In order to ensure your client receives the best payout possible, it’s essential to work with a life settlement broker who understands the process and can work with you and your client to effectively navigate it from start to finish. At Life Settlement Advisors, we strive to offer sound advice to every client or advisor we meet so they can make the best decision possible. If you’re interested in learning more about the life settlement process or you have a client who may qualify, reach out to us today.
