Clients rely on fiduciaries to guide them through complex financial decisions, especially as they age and their financial priorities shift. Life settlements are gaining attention as a way for seniors to turn unwanted or unneeded life insurance policies into immediate cash. That growing interest makes it essential for advisors to understand how the process works and how to navigate it in a client’s best interest.
In Grill, et al. v. Lincoln National Life Insurance Co., a couple sued their advisor after surrendering a policy they later learned could have been sold for significantly more. Understanding the life settlement process helps you protect your clients and fulfill your fiduciary duty with confidence.
This fiduciary guide to life settlements outlines how life settlements work for advisors, what to expect at each step and how to prioritize client protection and compliance.
INITIAL REVIEW: WHAT MAKES A POLICY ELIGIBLE?
Before you explore a life settlement for your client, you’ll need to determine whether the policy is a good fit. Your client can choose to sell all or just part of the policy. Not all policies qualify, so start by gathering the basic information.
Here’s what to look at:
- Policy type: Universal life, whole life and convertible term policies are the most commonly eligible.
- Insured’s profile: Most buyers look for individuals age 65 or older, especially those with some health impairments.
- Face value: Policies with a death benefit of $100,000 or more tend to attract interest.
- Cash surrender value: Helps assess whether selling or surrendering the policy is the better option.
- Premium payments: High or rising premiums can strengthen the case for selling, especially if the client no longer wants to maintain the coverage and would like to access its value while living.
WORKING WITH A BROKER: WHY REPRESENTATION MATTERS
If the insured appears to be a good candidate, the next step is to engage a licensed life settlement broker. Brokers represent the policyholder and help secure the best possible offer by inviting multiple providers to bid on the policy.
Unlike providers, who represent institutional or private investors, brokers work only for the seller. Instead of buying policies, they manage the bidding process and advocate on behalf of your client.
Brokers also handle much of the coordination, including:
- Preparing the case: Gathering medical records, prescription history, life expectancy reports and a copy of the insurance policy.
- Determining policy value: A knowledgeable broker has the ability to price the policy and help the seller understand it’s true value.
- Marketing the policy: Distributing the prepared case file to qualified investors and collecting offers.
- Coordinating next steps: Staying in touch with prospective buyers, keeping you and your client informed and helping ensure all necessary documents are submitted correctly and on time.
As an advisor, it’s important to work with a broker who has a strong reputation, clear communication and no conflicts of interest. A good broker like Life Settlement Advisors helps your client get fair market value without unnecessary delays or surprises.
UNDERWRITING AND VALUATION: HOW BUYERS DETERMINE POLICY VALUE
Once a broker submits your client’s policy to prospective buyers, underwriting begins. This step is crucial in determining the policy’s value on the secondary market.
Buyers in this space include institutional investors, such as hedge funds, pension funds and private equity firms, as well as accredited investors like family offices and high-net-worth individuals. These investors purchase policies as long-term assets, with returns based on the eventual payout of the death benefit.
To evaluate the policy, buyers look at factors such as:
- Life expectancy reports: Independent third-party actuarial firms assess the insured’s likely lifespan, typically expressed in months or years.
- Policy details: The face value, premiums and any policy loans or riders all affect the offer.
Using this information, prospective buyers calculate how much they’re willing to pay based on the expected return. In general, shorter life expectancies and lower ongoing premiums increase a policy’s value.
As an advisor, reviewing these assumptions can help you assess whether an offer is fair and ensure it aligns with your client’s financial goals.
HOW TO HELP YOUR CLIENT EVALUATE OFFERS
Once underwriting is complete, your client receives formal offers from one or more prospective buyers. The broker should present a summary of each bid, including the gross offer, fees and expected net proceeds.
At this stage, you help your client assess key factors:
- How the offer compares to the policy’s cash surrender value (offers are often four to five times more than the surrender value)
- Tax consequences of selling the policy
- Impact on estate planning or long-term financial goals
Make sure your client understands the numbers and has time to ask questions. Your guidance ensures the decision supports their best interest.
WHAT TO EXPECT DURING CLOSING
After your client accepts an offer, the transaction moves into the closing phase. This involves finalizing paperwork, transferring ownership and releasing funds.
Here’s what typically happens:
- 1. The seller, buyer and broker sign the settlement contract.
- 2. Escrow arrangements are set up to hold funds securely.
- 3. Policy ownership and beneficiary are formally transferred.
- 4. The buyer assumes premium responsibility once the sale is complete.
Once everything is confirmed, funds are released from escrow to your client. At this point, they no longer own the policy, nor do they have to pay premiums anymore.
STAYING COMPLIANT AND PROTECTING YOUR CLIENT
Most life settlement transactions are regulated at the state level. However, some may also be subject to federal oversight. Variable life policies, for example, are considered securities and may fall under SEC and FINRA rules.
Before moving forward, take time to:
- Review state requirements: Licensing and disclosure rules vary by state.
- Check if federal rules apply: Variable policies and securitized settlements may involve SEC or FINRA compliance.
- Verify the buyer: Ensure the life settlement broker is licensed and in good standing.
- Document everything: Keep detailed records to show you acted in your client’s best interest.
Solid documentation and due diligence are key to life settlement compliance and protecting clients in life settlements.
CONFIDENCE IN A TRANSPARENT, REGULATED PROCESS
Life settlements can be a smart option for clients who no longer need or want their life insurance policy. When handled properly, the process is regulated, transparent and built to protect policyholders.
As a fiduciary, your role is to make sure your client understands their options, receives fair market value and works with licensed professionals. Competitive bidding, full disclosures and thorough documentation help create a positive outcome for your client.
Life Settlement Advisors is a licensed broker that works exclusively on behalf of the seller. Reach out now to request a free review of your client’s policy or evaluate a case.
