A life settlement allows a client to sell an existing life insurance policy to a third party in exchange for a cash payout greater than the policy’s surrender value. For clients with policies they no longer need or can no longer afford, this strategy can unlock capital for healthcare, long-term care or retirement income.
But here’s the problem: Many financial advisors either fail to mention the life settlement option to their clients or do not understand how to evaluate it appropriately. In a profession built on fiduciary responsibility, that is not just an oversight; it’s a potential breach of that duty.
So, what exactly is an advisor’s fiduciary duty for life settlements? This article examines the legal and ethical obligations associated with providing comprehensive financial guidance, how a life settlement fits into that picture, and why omitting this option could leave advisors and their clients vulnerable. If you are a financial advisor committed to acting in your client’s best interest, it is time to take a closer look at life settlements.
FIDUCIARY DUTY 101: WHAT IT MEANS FOR FINANCIAL ADVISORS
Whether you are a financial advisor operating under the SEC fiduciary rule (Reg BI), the CFP Board’s Code of Ethics and Standards of Conduct or your state’s fiduciary laws, the expectation is clear: You have a fiduciary duty to your clients to act with loyalty, care and complete transparency.
That means offering financial advice that aligns with your client’s best interest, not just what is convenient or familiar. It also means you must avoid omissions. If there is a viable financial planning strategy that could significantly benefit your client, and you fail to bring it up, that may raise questions about your diligence and judgment.
Regulation Best Interest (Reg BI), for example, requires brokers and advisors to “eliminate, or at least disclose, all conflicts of interest” and to “understand the potential risks, rewards and costs” of any recommendation. Failing to disclose the life settlement option, especially when a client’s policy is at risk of lapsing, could put an advisor out of alignment with that standard.
LIFE SETTLEMENTS: A LEGITIMATE FINANCIAL PLANNING STRATEGY
Life settlements are not fringe products. They are regulated transactions that offer a valid exit strategy for clients who no longer need their life insurance policy. In many cases, this option can deliver a significantly greater return than a policy’s surrender value, making life settlements a legitimate component of retirement planning.
A life settlement can be a huge benefit when:
- The policyholder no longer needs the policy for estate planning purposes
- Their health has changed, improving their eligibility for a life settlement.
- The premiums have become a financial burden.
- They are about to surrender the policy or let it lapse.
- They need liquidity for long-term care or retirement expenses.
In most of these scenarios, the client would receive more from a life settlement than they would by surrendering the policy. And yet, the life settlement option remains underutilized, largely because many financial advisors do not offer it to their clients or do not feel confident in doing so.
REAL-WORLD CONSEQUENCES OF FAILING TO MENTION LIFE SETTLEMENTS
Financial advisors who fail to mention life settlements to their clients risk more than missed opportunities. They also risk liability. Several court cases have highlighted what can happen when advisors fail to inform their clients about the option to sell a life insurance policy:
- In Graham-Bingham Irrevocable Trust v. John Hancock, the court rejected the argument that the policyholder should have independently been aware of the secondary market. John Hancock settled before trial after being accused of violating Washington’s Consumer Protection Act.
- In Grill v. Lincoln Nat. Life Ins. Co., a class action alleged systemic nondisclosure of life settlements. The claim asserted that insurers and financial advisors failed to disclose the option to preserve company profits. That case was also resolved through a private settlement.
- Another lawsuit, Joseph v. Kaye, alleged the intentional omission of life settlements as part of a broader industry practice. It included charges of financial elder abuse and violation of consumer protection laws.
The takeaway is clear: With life settlements, a financial advisor’s failure to meet their disclosure requirements can create legal exposure and damage client trust in the advisor, their firm and the advising industry as a whole.
HOW TO ETHICALLY AND PROFESSIONALLY INTRODUCE LIFE SETTLEMENTS
Discussing the life settlement option with your clients is a good practice, but timing and transparency matter. Here are some opportune moments to start the conversation with a client:
- They want to surrender a policy or let it lapse.
- The client no longer needs the coverage due to changes in their estate plan.
- The cost of premiums has become a concern.
- They’re facing unexpected healthcare or long-term care expenses.
When raising the topic, provide balanced information, including the potential benefits, tax implications and any transaction costs. Also, be sure to partner with a licensed life settlement broker that values client education and puts transparency first.
Document the conversation. Note why you presented the option, what materials you shared and the client’s response. This not only protects you but also reinforces your commitment to your fiduciary duty.
Clients do not expect advisors to recommend every financial product under the sun. But they do expect you to recommend the ones that could make a meaningful difference.
RAISE THE BAR ON CONVERSATIONS ABOUT LIFE SETTLEMENTS
A life insurance policy is often one of your client’s most overlooked assets. When the client no longer needs the policy, letting it lapse or accepting a surrender value without exploring alternatives may fall short of a financial advisor’s fiduciary responsibilities.
By raising the option of a life settlement at the right time, you demonstrate deeper due diligence and a broader financial vision. You’re protecting your client’s interests, preserving potential value and reinforcing their trust in your judgment.
At Life Settlement Advisors, we work with financial professionals nationwide to help evaluate policies, explain options and deliver value-focused outcomes. If you are committed to comprehensive, client-first planning, the life settlement conversation is essential.
Ready to explore whether your clients could benefit from a life settlement? Reach out to Life Settlement Advisors today for guidance and support that puts your clients and your reputation first.
