What Does it Mean to Be A Fiduciary When Managing Life Insurance Policies?

Did you know you can sell all or a portion of a life insurance policy, even term insurance?

(3 minute read) 

A fiduciary is an individual or organization who holds a legal and ethical relationship of trust with their clients. As a fiduciary, it’s essential to put the best interest of clients first and foremost, making decisions and managing assets on their behalf to their biggest benefit.

Life insurance is one of the assets a fiduciary financial advisor will encounter within a portfolio, and it’s also one of the assets that may become unneeded or unwanted over time. When clients have sold a home, or reduced their debt, they may no longer need a large life insurance policy. Or, if their income has been reduced, they may no longer want the policy because it represents an expense.

Depending on the type and value of the life insurance policy, clients have many options for how to manage their life insurance policies. But what a lot of advisers don’t realize is that a life settlement is one of the few options that actually helps you succeed better in your fiduciary duty. How? Let’s find out.

Surrendering Life Insurance Means Losing Value

When a life insurance policy is surrendered, the insurance company does calculations to determine the policy’s cash surrender value. If the policy is being surrendered early, there may also be fees applied before the cash is released to the policy holder.

Not every type of life insurance policy can be surrendered for cash value. Term insurance is not able to be surrendered for cash, as it has no cash value.

While surrendering a permanent life insurance policy will recoup some of the investment your clients have made, it won’t be as much as the return from a life settlement. This is why, as a fiduciary, you have a responsibility to make clients aware of other options that could get them a larger return on the policy.

Donating Life Insurance Complicates the Value

Clients also have the option to donate an unwanted or unneeded life insurance policy. However, this isn’t so simple as assuming that donating a policy with a $100,000 cash value equates to a $100,000 tax deduction for the policyholder.

Either the basis of the policy (the total amount of premiums paid) or the cash surrender value will be the amount that can be deducted from taxes. However, it’s important to know the policy holder will deduct whichever is the lesser of these two numbers.

Plus, the policyholder will assume the expense of an appraisal of the policy. And, some nonprofits don’t maintain the policy, but will turn around and cash it out themselves, meaning the policy holder could be taking a tax hit for no compelling reason. In many cases, it’s far more practical to sell the insurance policy and donate cash to the charity.

Exchanging Life Insurance Might Not Solve the Problem

Another strategy to manage an extraneous life insurance policy is to exchange it. These exchanges, also known as 1035 exchanges, allow a life insurance policy to be exchanged for another life insurance policy, or an annuity. While this frees the policy holder from paying tax on the investment gains in the original policy, in the end, they are still the holder of a life insurance policy they don’t want or need. While the cost of the policy may be lower, or the benefit may have new features, the concern which caused the client to want to get rid of the insurance still remains. They need CASH!

Selling Life Insurance Turns an Expense into Maximum Possible Liquidity

Selling a life insurance policy in a life settlement allows a policy holder to make the most of the benefit by selling all or a portion of the policy. This transaction is often in the best interest of the client because they are able to sell the policy for greater than the surrender value, while potentially still maintaining a portion of the policy. While these transactions may not be ideal for every client, the option to sell the life insurance policy should at least be presented as part of the fulfillment of your fiduciary duty.

Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.

Leo LaGrotte
Life Settlement Advisors
llagrotte@lsa-llc.com
1-888-849-0887

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