What Trustees Should Know About Life Settlements
Tuesday, June 1, 2021
Section: Members

When an elderly parent’s health deteriorates, it can become necessary to appoint older children as trustees. A trustee takes legal ownership of the assets held by a trust and assumes fiduciary responsibility for managing those assets and carrying out the purposes of the trust. This includes managing financial assets such as life insurance policies.
Life insurance policies can help cover the expenses when you lose a loved one; however, access to extra money can often be beneficial in advance. This is where life insurance settlements come into play. Life insurance settlements offer an option for those in charge of their elderly parent’s finances. These funds can help pay for long-term care, such as hospice or palliative care.
In this blog, we’ll outline how life settlement can help your client’s trustees and what they need to know about selling their parent's life insurance policy.


How Can Life Settlements Help Your Client’s Trustees?

Life settlements refers to the selling of an existing life insurance policy, similar to the sale of personal property. A third party buys the policy and pays all of the premiums. In exchange, the insured gets an immediate lump-sum cash payment.
For children who look after their elderly parents and require money to cover expenses such as long-term care, life settlements can be a welcomed source of funds. And as a consumer advisor, you serve a special purpose by helping them navigate the process and negotiate for the best deals.

There are clear benefits for a policyholder to sell their life insurance. However, the selling of life insurance policies is attractive from an advisor's point of view as well. Recommending an appropriate life settlement can help you:

  • Build deeper relationships with your existing clients and help to bring on new ones

  • Earn referral fees or commissions, depending on the laws and regulations in your state.

  • Differentiate yourself from the competition.

  • Serve as a trusted advisor for families. 


Who Is A Good Candidate For Life Settlements?

Not all life insurance policies are settled. The most common are universal life, term life, and second-to-die insurance. All must have a face amount above $100,000, and the policy’s market value must exceed the cash surrender value.
Several factors like the policyholder’s age and their current situation are also taken into consideration. For instance, they must be over 65 and have a life expectancy of fewer than 12 years.


The Typical Process For Selling Life Insurance Policies

The life insurance settlement journey is complex and involves multiple entities: trustees, brokers, life expectancy underwriters, life settlement providers, and investors. It’s important to keep in mind that regulations vary by state, so as a fiduciary, you’ll need to be sure that everyone's needs are being met and laws are followed at all times.
In general, most life settlements follow this nine-step process:

  1. The trustee realizes there’s a need to pay for an expense such as long-term care. As an advisor, you suggest selling the parent’s policy as a way to source funds when appropriate.

  2. The trustee includes the necessary documents to complete the settlement application.

  3. You’ll work with the settlement provider to gather all supporting documentation to verify the insurance and medical status of the policyholder.

  4. The application is reviewed to determine viability. This is when potential fraud is flagged. Brokers and providers will bid to purchase the life insurance policy after evaluation.

  5. Next, a life settlement provider will match the policy for appropriate funding. At this stage, it can also be determined if the settlement doesn’t qualify.

  6. Here you’ll be contacted with an offer. Your client does not have to accept the offer and can seek others from different providers.

  7. If you and your clients accept the offer, you’ll receive a closing package to review and sign.

  8. Once the documents are signed, the insurance carrier is notified of the change of ownership.

  9. Settlement funds are then transferred to the policy owner or their trustees.

As soon as the insurance policy changes ownership, your client’s trustees are no longer associated with the life insurance.


Key Takeaway

For many people, it is difficult to balance trustee responsibilities and find the best long-term healthcare for their parents. Your guidance and knowledge of life settlements, including what it is, how it applies, and their best options, can make a huge difference in your clients' lives. 
While this blog gives you a high-level overview of the life settlement process, the industry moves fast and regulations change often. Stay up to date with valuable industry information and trends by subscribing to our blog.