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Life insurance policies provide value to decedents and their beneficiaries, but the need for that value changes over time, especially as family financial situations change. Many seniors take out life insurance policies and place them into Irrevocable Life Insurance Trusts (ILITs) in order to provide liquidity for federal estate taxes.
Life insurance policies are considered part of taxable estate assets, and if that policy’s value is higher than the tax exclusion value, it will be heavily taxed. When placed into an ILIT, the policy avoids the estate tax, allowing policy holders to retain more of their asset value.
This was a common reason for many seniors to put their policies into an ILIT, but in recent years, the tax exclusion rate has changed. In 2019, the exclusion value was raised to $11.4 million per individual. For many seniors, keeping their policies in an ILIT is no longer necessary, especially if the policy’s high premium cost outweighs the need to keep it around.
When an ILIT Under-Performs
Although trustees should consider the trust’s asset performance, it’s typical for advisors to simply check that the policy is still doing well. This often means that they aren’t making any adjustments or changes if the trust isn’t decreasing in value. In reality, this is allowing the ILIT to under-perform, especially when you consider the missed opportunity of turning that policy into liquid assets.
Selling an ILIT
For policies that aren’t performing well, maintaining premium payments doesn’t make sense anymore. As an advisor, you should consider discussing the possibility of selling the policy through a life (or viatical) settlement. In a life settlement, a policy is sold to a third party, transferring the death benefit to the buyer. For many seniors, life settlements provide a cash value that is significantly higher than the policy’s surrender value.
Let’s look at how selling a policy out of an ILIT can provide a real benefit. Ms. William, an 84-year-old woman, had a $1.6 million universal life policy held in an ILIT that she originally purchased for Federal estate tax purposes. But because of some of the changes in estate tax laws, she no longer needed that policy. Ms. Williams made the decision to no longer fund the premiums and the policy had a cash surrender value of $78,560. After putting her policy on the market, she accepted a final bid of $428,000.
As an advisor, you have a responsibility to make sure that your clients are utilizing their assets to the best of their ability. If they have a life insurance policy held in an ILIT that no longer serves its purpose or underperforms, you might research the value of selling it through a life settlement (viatical settlement).
Have any questions about how a life settlement works? I would be happy to provide additional answers! Please don’t hesitate to call me at 888-849-0887, or email me at email@example.com.