(3 Minute Read)
Many advisors use irrevocable life insurance trusts (ILITs) as a means to best handle their client’s money, and to ensure that the families of their clients are taken great care of in the event of the client’s death. By managing future estate taxes, you’re saving the family potentially hundreds of thousands of dollars that can have a big impact for them in the future. But many trusted advisors are missing one huge opportunity in life insurance trusts, and it’s right under their noses!
Often, life insurance policies simply under perform. And in ILITs, investable capital can get tied up by simply paying the premiums for these policies—especially if the premiums have increased over time, as many of them do.
Changes in estate taxes have also had an impact on the worth of policies in ILITs. The American Tax Payer Relief Act of 2012, for example, raised the estate tax exclusion to $5.25 million. That amount has increased in 2016 to $5.45 million. This saves the majority of American households from the burden of the estate tax, making ILITs a little less necessary than before.
When you consider interest rates as well, life insurance policies aren’t raking in the amounts they could have been. The historically low rates dropped the earning potential on many policies to well below numbers that could be considered good returns. And even though the Fed is set to boost the insurance rate for the first time in years, it may still be quite a while before we see them get back to a rate that means good news for life insurance investments.
As the trustee of an ILIT, it’s your job to review the trust for asset performance. But in these reviews, many trusted advisors overlook opportunities to turn life insurance policies into liquidity, allowing for more flexible investments to better suit the beneficiaries of the trust.
In an ILIT, you can still sell an under performing life insurance policy in a life settlement. A life settlement is the sale of a person’s life insurance policy to a third-party investor. In a life settlement, the policy’s owner transfers the ownership of that policy in exchange for an immediate cash payment from the buyer. Candidates for life settlements are typically 70 or older, with a life insurance policy that has a “face value” (death benefit) of more than $100,000.
By selling the under performing policy, you’re opening up an opportunity to invest in other, more lucrative opportunities, providing a higher performing trust for the beneficiaries.
Does your client have an under performing policy in an ILIT? We can make the process of selling it in a life settlement easier. Use our qualification calculator to see if the policy is a good fit.
Do you have other questions about life settlements? I would be happy to answer them. Call me at 888-849-0887, or email me at llagrotte@lsa-llc.com.
Leo LaGrotte
