Eye on 7 of the most common life settlement situations

by BY ROBIN S. WEINBERGER AND PETER N. KATZ | October 07, 2015 Leave a Comment

A life settlement can be a great alternative to accepting the insurance company’s surrender value, if any, for a policy that is about to be lapsed or surrendered. While there are many reasons a policy may be terminated, certain scenarios are the most common. Keeping an eye out for these situations is one more way for you to help your clients.

(1) The sale of a business or other illiquid asset. 

A policy bought for a buy sell agreement or estate liquidity may become unnecessary. Compounding the problem is that the business was typically paying for the policy is some manner (either directly, if the policy had been business owned, or indirectly, through the use of a bonus or split-dollar arrangement). With the business no longer in the picture, both the need for the policy and the ability to pay for it may have vanished.

(2) Business owner retiring or exiting from business. 

Business owners frequently acquire a number of life insurance policies in the course of operating their company that are no longer wanted upon retirement or termination. These include buy-sell, key person, fringe benefit, creditor protection and even pension policies. Like #1, keeping a policy that is no longer needed without a business to pay for it can be problematic.

(3) A decline in estate value and/or a decrease in estate tax liability. 

Both today’s struggling economy and the drastic reduction in estate tax liabilities resulting from the Taxpayer Relief Act of 2012 (ATRA) make this particular scenario quite common. Keeping the policy, however, might still be a good deal for heirs, but people are typically reluctant to keep more life insurance than is absolutely necessary.

(4) Term policies or riders that are about to expire, lose their conversion privilege or come to the end of their current premium guarantee.  

Term policies are among the most likely life settlement prospects to be overlooked. Many advisors and clients don’t realize that a term policy (including group term), if convertible to Universal Life, can be sold in a life settlement. 

Since term policies generally don’t have any cash surrender value, a life settlement can truly provide “found” money. Furthermore, these situations typically result in a conversion sale in addition to the settlement.

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