Even the best retirement financial advisor may never have facilitated a life settlement for a senior client. But life settlements are helping people retire with more cash on hand and fewer recurring bills on a fixed income. Life settlements yield great liquidity, are highly-regulated, and require very low effort from the policyholder and their advisor to facilitate these transactions. Yet they are not often utilized. But disclosing the opportunity for a life settlement is an essential step for a fiduciary financial advisor, because these transactions may be in the client’s best financial interest.
A life settlement is the sale of part or all of an unwanted, underperforming, or obsolete life insurance policy, even term insurance. This is different from surrendering the policy back to the insurance company. In a life settlement, the policy is sold to a third party investor who pays the full premiums. They ultimately collect some or all of the death benefit, depending on whether they purchased some or all of the policy.
As a retirement planner and trusted advisor, it’s important to be aware of key use cases where a life settlement could work for your clients near or in retirement. This can even be a chance for them to leave a portion of a policy behind for their heirs while still gaining back some of their investment to use in their golden years.
How Does a Life Settlement Work?
To qualify for a life settlement, the policyholder typically must be over the age of 65 with a life expectancy of three or more years. No medical examination is required. However, the policy must have a value of at least $100,000 to qualify for a life settlement. There are a few other details that also go into qualification.
An individual should not sell their life insurance policy themselves: for the best results in selling a policy, the transaction must be facilitated through accredited life settlement and financial professionals. A team of independent underwriters examine the policy, medical records of the policyholder, and other basic data to determine if the applicant is a good fit for a life settlement.
If the insured qualifies to sell their policy, investors make an offer, which the policyholder has the right to refuse. They accept a lump sum of cash while the new owner pays the premiums and maintains the policy. The seller’s (insured) return on this transaction is sometimes ten times or more than the surrender value of the insurance policy.
This is why informing clients of the life settlement option is such an important part of fiduciary duty. If you advise a client to surrender or lapse a policy that could have netted tens or hundreds of thousands of dollars in liquidity through a life settlement, you have not met your fiduciary obligation. The client may not want to proceed with a life settlement, but they should at least be aware they have the option.
One unique transaction worth mentioning is a term life insurance settlement. If your client has term insurance that can be converted into a universal or whole life policy, that term insurance can also be sold in a life settlement.
After the life settlement is completed, policyholders will be taxed on their returns from the transaction, less the amount of premiums they have previously paid. For example, if your client has paid $25,000 in premiums over the lifetime of the policy, they will not be taxed on the first $25,000 they receive in a life settlement. But the dollars over that amount will be taxed as long term capital gain.
How Can a Life Settlement Be Part of Retirement Planning?
Life settlements can be part of financing life at all stages of retirement. Here is how a life settlement could be a beneficial transaction from the early days of planning forward.
1. Late Career Retirement Planning
As individuals and couples grow closer to retirement, they may realize they don’t have the funds on hand they will need to sustain their retired life for 20-30 years or more. Selling excess life insurance in a life settlement generates a return on the policy that can be invested elsewhere to support the policyholder’s retirement. If they only sell a portion of a large policy, some of the benefit can still be retained for family and estate needs. Or, a client with multiple policies can keep ones that are essential and gain a return on those which are not.
2. Downsizing and Lifestyle Transition
Retirees often want to sell the homes they have owned in their working years and downsize or move to a new location for retirement. If your clients happen to be parents, their children are also likely to be self-supporting adults. This increase in freedom and flexibility can render some life insurance policies obsolete. Without a mortgage to cover or the kids to worry about, retirees can sell some insurance policies that were taken out with those needs in mind. These transactions get more of the long-term investment back for the policyholder to use in retirement themselves.
3. Opportunities for New Experiences
Nearly every retiree has a bucket list of places they want to visit and things they want to do and see now that they’re no longer punching the time clock. But on a fixed income, taking advantage of these new opportunities can be challenging. A life settlement generates cash that can take retirement to the next level of comfort and joy in just a few months time.
4. Meeting Unexpected Financial Needs
Retirement is full of unexpected events, some positive and some not. A life settlement can also provide necessary funds for medical care, housing, and other essentials. The funds from a life settlement become the policyholder’s to use as they will.
5. Giving to Charity
Sometimes an individual wants to give something back to a charity or the community as part of their activities in retirement. Getting the funds to give through a life settlement allows the policyholder to make the gift during their lifetime and see the funds at work. This also saves them the cost of the premiums to maintain the policy throughout their life if they name the organization a beneficiary to the policy.
What Percentage of Retirees Use a Financial Advisor?
According to PEW Trusts, around 33% of retirees use a professional investment advisor. These clients are looking for the best retirement financial advisor, who charges transparent fees and gives unbiased advice about opportunities.
Recommending a life settlement helps an advisor stand out in both these ways. The whole transaction is very transparent and closely-regulated, with every question answered for the policyholder along the way. They will know exactly what return they are getting on their policy and most often will receive multiple offers.
While a life settlement isn’t the most traditional way to gain liquidity from assets in a portfolio, offering the option to your clients shows you are putting their needs first and keeping an open mind. You never know who will see the incredible opportunity these transactions ultimately represent, and decide to take advantage.
Can a Certified Retirement Planner Facilitate a Life Settlement for a Client?
A Chartered Retirement Planning Counselor (CRPC) is one of the many financial professionals who can help their clients transact a life settlement. You will need to work with a company like Life Settlement Advisors, which is able to bring the policy to the market and complete the deal according to regulatory guidelines and industry best practices. This means for the retirement planner, jobs include getting necessary paperwork and documentation as well as representing the policyholder and any of their concerns or questions. That’s it!
How long does it take to get a CRPC certification? Candidates must pass the exam within one year of enrolling for the certification, and they have to attempt the exam within the first six months. With all that high pressure studying, CRPCs and other financial professionals deserve to share the load a bit with other experts. Life Settlement Advisors is here to provide you with insights you need and answer any and all questions about how life settlements work. We believe in complete transparency for you and your clients.
Do you have at least one client in mind who might be able to benefit from a life settlement? If not, we are confident a day will eventually come when a client is the right fit for these transactions. If so, you can refer to our resources for advisors to get more guidance and ideas about how to approach the conversation. Your client can also visit our life settlement qualification calculator to share some basic details about themselves and their policy. This will let you know if there is a high opportunity for this transaction to yield high returns!
If you have any further questions about life settlements, what they are, how they work, the regulations in our industry, our credentials, or anything else, please reach out to us at 1-888-849-0887 or complete our contact form.
