Incorporating Life Settlements into Your Client Strategy

In the right situation, a life settlement is a win-win. You fulfill your fiduciary responsibility by helping your client maximize the value of a life insurance asset. And your client frees up funds to fulfill top-priority financial goals.

Common misconceptions around life settlements

Common barriers to customer adoption in any industry are lack of awareness and misinformation. The life settlement industry faces both issues. Many insureds don’t know they can sell their life insurance for far more than its cash value. others harbor negative misconceptions about such transactions.

Those misconceptions can have insureds convinced that life settlements are not well regulated, policyholders must be terminally ill, the cash proceeds of life settlements and policy surrenders are the same or that there are limitations to how proceeds are spent. Let’s put these inaccuracies to rest:

• Regulation: Life settlements are legal and enforceable. Forty-two U.S. states have regulations in place to promote equitable treatment of policyholders, insurance companies, and advisors in life settlement transactions.
• Health of policyholder: Healthy policyholders are eligible for life settlements. There is a different type of life insurance sale called a viatical settlement, which is reserved for the terminally ill. 
• Life settlements vs. policy surrender: Life insurance policies often sell for four to eight times the policy’s cash surrender value and up to 60% of the death benefit. 
• Use of proceeds: There are no limitations on how the policyholder uses the life settlement proceeds, other than paying any taxes incurred.

How to know when a life settlement is a viable option

You can discuss life settlements with your clients reactively or proactively. Two situations commonly prompt a reactive discussion. Either your client mentions surrendering the life insurance or the client asks about ways to generate liquidity. The proactive conversation can happen any time, if you are annually evaluating the wealth locked in your client’s life insurance.

When the client no longer wants the policy

Clients who no longer want or need their life insurance will appreciate knowing there’s another option beyond surrendering the policy or letting it lapse. Those who aren’t familiar with life settlements will likely be surprised—thrilled, perhaps—by the policy’s value on the secondary market.

When the client needs liquidity

If a client needs liquidity for any reason, selling the life insurance should be one of the strategies considered. A life settlement can be far less disruptive to the client’s financial health than, say, a reverse mortgage or liquidation of securities.

When there’s a better use for the wealth locked in life insurance

Life insurance is an asset. And, like any asset, it can be a high performer or a low performer. With securities, you periodically identify and replace low performers to optimize your client’s portfolio. Why not do the same with life insurance?

An annual analysis could reveal that the policy is performing well. That gives your client and you confidence that the insurance is a good investment. Alternatively, that analysis could show that selling the policy, eliminating the premiums, and investing the proceeds elsewhere is the more fruitful strategy.

Either way, a proactive life insurance analysis gives you an opportunity to advise your client in a way that differentiates you from many competitors—the contingent of financial advisors who prefer to ignore their clients’ life insurance assets.

Valuing a life insurance policy

The first step in determining the viability of a life settlement is understanding the policy’s market value. A reputable life settlement broker will estimate policy values for free. You can also use a free life settlement calculator (such as My Policy Predictor by Harbor Life Brokerage).

You can use the policy’s estimated value, future premiums due, your expected rate of return on new funds plus your client’s life expectancy to model the reinvestment of life settlement returns. Comparing the projected result to the policy’s death benefit can point to whether the policy should be kept or sold.

Monetization opportunities for financial professionals

If analysis and discussion reveal that a life settlement may be the best way to manage the client’s life insurance, know there’s something in it for you, too. For facilitating life settlements, you can earn referral fees, override fees and, if the client invests the proceeds with you, reinvestment fees.

Here’s a good place to point out that you can work with a life settlement provider or a life settlement broker to sell life insurance. These two roles approach the transaction differently, however. Providers sell life insurance directly to investors for the lowest possible price. Brokers market the policy to get the highest price, which results in greater cash proceeds for the policyholder.

A life settlement provider may pay a referral fee of 2% of the policy’s face value. Brokers may have added incentives. As an example, Harbor Life Brokerage will pay referring financial advisors 50% of the broker commission, which is typically 18% of the sale price.

Override fees are referral fees for transactions initiated through the financial advisor’s network. So if you refer a colleague advisor who then proceeds with a life settlement, you could earn an override fee on that transaction.

And finally, you would earn a higher asset management fee if the client rolls the life settlement proceeds into the portfolio you oversee.

Rethinking life insurance and life settlements

Life insurance is an asset that can work for or against your clients. A policy that performs justifies the premium costs and liquidity constraints. Unfortunately, it’s all too common for life insurance to use and hold value that’s better deployed elsewhere.

A life settlement maximizes a policy’s liquidation value. If you have clients that would benefit from improved liquidity or a financial restructure, it’s time to have the life settlement conversation. The client will ultimately decide whether to sell, keep, or surrender the policy. Regardless of that decision, you can feel confident you’ve fulfilled your fiduciary duty by providing the facts about life settlements.

Lucas Siegel is the CEO of Harbor Life Settlements & Harbor Life Brokerage, which offers the world’s most advanced life settlement auction site and the first-ever AI-powered life settlement calculator.