After decades in the workforce, retirement should be a time for seniors to relax and enjoy the fruit of their long-term labors.
According to data from the AARP, 61% adults over 50 worry they will not have enough money for their retirement. To help clients comfortably navigate their later years, financial advisors often focus on liquidity: ensuring that clients have enough money on hand to support evolving goals.
One option that’s often overlooked is life insurance settlements. Here’s a look at life settlements for financial advisors and what they need to know about aligning settlements with comprehensive retirement income strategies.
WHY LIQUIDITY PLANNING IS MORE IMPORTANT THAN EVER
Seniors face a triple challenge: rising care costs, inflation pressures and longer lifespans.
As noted by data from AARP, home care now costs $30 per hour on average, or $60,000 annually. According to the U.S. Bureau of Labor Statistics, meanwhile, inflation continues to trend steadily upward, creating a double-whammy of rising costs for seniors.
Add in longer lifespans — the average life expectancy in the United States is now 78.4 years — and it makes sense that more seniors are pushing back retirement to ensure they have enough liquidity for the next 10, 20 or 25 years.
To help clients enhance their liquidity, many financial advisors use familiar tools such as required minimum distributions (RMDs), annuities and Roth conversions. But there’s another option: permanent life insurance policies that clients no longer need. By selling these polices to third-party buyers, seniors can recoup a portion of their investment and access an additional source of liquidity.
WHAT ADVISORS SHOULD KNOW ABOUT LIFE SETTLEMENTS
A is the sale of some or all of a life insurance policy to a third- party purchaser. It is different than a loan or an accelerated benefit because the benefit itself is transferred to the buyer, who also takes over any premium payments. The buyer then pays the original policy holder an agreed-upon lump sum.
There are several requirements common to life settlements, including:
- Age: Settlements are typically offered to policyholders 65 or older.
- Policy size: Buyers generally purchase policies worth $100,000 or more.
- Health: Poor health or chronic health conditions may lead to higher payouts since policies will likely be redeemed sooner.
Here’s an example. Mr. Smith is 72 years old and has a $200,000 permanent life insurance policy he no longer needs. He chooses a life settlement and receives an offer from a buyer for $50,000, which he accepts. The policy is then modified to show the buyer as the beneficiary, and the buyer is now responsible for all premium payments. Mr. Smith receives $50,000 as a lump-sum payment.
It’s worth noting that life settlements are different than a life insurance policy surrender. In the case of surrender, the policy is returned to the original insurer, and the policyholder receives a set payout, which is typically four to seven times less than the value of a life settlement.
WHERE LIFE SETTLEMENTS FIT IN RETIREMENT PLANNING
When it comes to retirement income strategy, life insurance settlements can help with:
- Offsetting RMD tax burdens: The lump sum obtained from life settlements can help pay for RMD taxes.
- Funding long-term care or home modifications: Life insurance settlements can reduce the burden of long-term care costs or help cover the price of home modifications, such as ramps, railings or other mobility aids.
- Delaying Social Security by creating a bridge income: More liquidity means seniors can delay taking Social Security, effectively creating a bridge between initial retirement and eventual Social Security collection.
- Reallocating illiquid insurance into income-generating assets: Clients may also choose to reinvest life settlement payouts into income-generating assets that advisors recommend.
- Reducing premium obligations: Once buyers purchase life insurance policies, they take on all premium costs.
Client Scenarios to Watch For
So, when does it make sense for advisors to raise the conversation about alternative retirement income options such as life settlements? Common scenarios include:
- Clients are downsizing their homes or updating their estate plans, meaning joint survivorship policies are no longer needed.
- Clients are considering a life insurance policy surrender.
- Premium costs are placing a burden on current finances.
- Family structure changes or changing family needs, such as medical issues, college costs or new grandchildren, necessitate more liquidity.
- Clients are unsure how they will fund long-term care for themselves or their spouse.
Best Practices for Maximizing Value
To maximize value and streamline the settlement process, financial advisors should follow several best practices.
First is working with a licensed life settlement broker rather than a direct provider. Brokers create a competitive bidding process among multiple buyers, in turn leading to better settlement values for clients.
In addition, advisors should coordinate with clients’ estate and tax advisors where needed to ensure any payable taxes are properly calculated and that life settlements align with estate planning expectations. Finally, advisors must fully
document all transaction details and ensure the process is entirely transparent to clients and buyers.
Fiduciary Duty and the Advisor’s Role
Advisors have a fiduciary duty to act in the best interests of their clients. This means that they have a responsibility to help clients make informed decisions about all their assets, including any underused or unnecessary life insurance. Avoiding this topic may be viewed as a disservice to their interests, especially if a policy lapses or they surrender it without considering alternatives.
A better practice is to recommend a policy review every few years to help clients identify insurance they no longer need or polices that are becoming too expensive to maintain.
ADD LIFE SETTLEMENTS TO YOUR RETIREMENT PLANNING TOOLKIT
Life settlements aren’t a silver bullet for improving client liquidity, but they are an effective tool in the right scenario. By selling policies to third-party buyers, clients can access a new source of cash that they can apply to the costs of care, leverage to make home improvements or use to achieve retirement goals like travel or taking on new hobbies.
Advisors who understand financial planning with life settlements — and who recommend these options appropriately — can help add real value to clients’ retirement plans. Consider working with an experienced life settlement broker to identify client eligibility and explore potential market value.
Ready to help your clients access more liquidity for their financial future? Connect with Life Settlement Advisors today.
