Retirement should be a time to slow down, relax and enjoy life. According to recent data from the AARP, however, most people don’t know when — or if — they’ll be able to retire. Consider that 20% of adults 50 and over have no retirement savings, and 61% aren’t sure they have enough money to support them in retirement. Even more worrisome? Twenty-six percent say they never expect to retire.
For financial and retirement planning advisors, these challenges also create an opportunity: Finding ways to help clients retire with more cash on hand. One potential option? Life settlements.
Here’s a look at how life settlements work, why clients may choose a life settlement, and how financial advisors help with life settlements.
WHAT IS A LIFE SETTLEMENT?
A life settlement is the sale of unwanted, underperforming or obsolete insurance policies. These may be whole, universal or term life insurance policies.
Settlements differ from a life insurance policy surrender. In the case of a surrender, the client returns the policy to their insurance provider and collects the cash surrender value. Typically, these values are low — and non-negotiable. In a life settlement, meanwhile, financial advisors work with a life settlement broker to help clients get the most value from their policy. It’s also worth noting that clients don’t need to sell their entire policy. If they have a large life insurance policy, they may choose to sell part of the policy for immediate returns and keep the remainder to provide some benefits upon death.
This starts with an assessment of the policyholder and the policy by a team of independent underwriters. Current medical conditions and pre-existing issues also shape potential policy value. In some cases, clients stand to gain significantly more than the surrender value of their policies. In others, their current age and health may limit their potential return.
No matter the result, financial advisors have a responsibility to present clients with all their potential options. Even if clients choose not to proceed with the settlement, they should be aware of the option. Consider a situation where clients could have earned tens or hundreds of thousands of dollars through a life settlement, but were not made aware of the option and instead surrender their policy. This can create a conflict between fiduciary duty and life settlements — if advisors fail to act in the best interests of clients (even inadvertently), it may lead to legal challenges.
WHY CLIENTS MAY CHOOSE A LIFE SETTLEMENT
There are several reasons clients may choose a life settlement instead of keeping their current policy. Let’s look at some of the most common ones.
Retirement Planning With Life Settlements
Depending on health and other factors, retirement can last 20, 25, 30 years or more. As individuals and couples grow closer to retirement, they may realize that they don’t have the funds to sustain their current lifestyle for the decades to come.
Selling a life insurance policy can provide a significant payout that provides both immediate cash and the ability to shore up investments before retirement begins.
Unexpected Financial Needs
Clients may also choose to sell their life insurance policy to meet unexpected financial needs such as sudden medical bills, unanticipated housing costs, or family emergencies. A sudden cash influx with no debt liability can provide immediate relief to cover these urgent issues.
Life Transition or New Experiences
Other reasons for life settlements include life transitions or new experiences. For example, couples may sell their policies to help grandchildren start college or buy their first home. Retirees may also choose to explore new adventures, such as traveling internationally, or opt to live a quieter life in comfort backed by the confidence that they have enough money to last.
Obsolete Policies
Finally, clients may choose to sell their policies if they are obsolete or no longer needed. Consider a couple with self-supporting adult children. The couple sells the house they’ve owned for decades, which earns a significant return and allows them to purchase a smaller property with cash. Without a mortgage to pay or children to worry about, they may have more life insurance than they need, rendering some or all of their policies obsolete.
FINANCIAL ADVISORS AND LIFE SETTLEMENTS
According to Pew Trusts, just over one-third of retirees use a professional investment advisor to help them navigate the financial challenges of their post- work life. Retirees want advisors who understand their needs, have in-depth knowledge of market trends, and can provide various options to maximize retirement savings.
However, many advisors aren’t familiar with life settlements. This frustrates efforts to get clients the best return on their insurance investments.
As a result, the first step in using life settlements for retirement planning is understanding how these settlements work and how clients can maximize their payouts. For instance, while clients could take policies to buyers directly, this typically results in lower payouts since they don’t have the experience or expertise to navigate the financial market. Advisors also need to provide transparency around the sales process and associated taxes.
For example, when a policy is sold to a buyer, the buyer takes over the premium payments and becomes the beneficiary of that policy. This means that the previous beneficiaries no longer receive the death benefit when the policyholder dies. Instead, the benefit goes to the new owner of the policy. In addition, advisors need to make clear that clients are taxed on the sale of their policy, less any premiums paid.
Advisors should work with experienced settlement companies, such as Life Settlement Advisors, to help bring policies to market, find multiple offers, and navigate regulatory guidelines. Get in touch with Life Settlement Advisors today to take the first step toward helping your clients maximize their retirement savings.
