Unlocking Life Insurance Value Through Settlements

Last autumn, a certified financial planner consulted about a couple, both aged 78, who held a $2 million guaranteed universal life insurance policy within an irrevocable life insurance trust (ILIT). Initially established in 2009 to address estate tax concerns when the federal exemption was $3.5 million per individual, the trust has since become less necessary due to the One Big Beautiful Bill Act (OBBBA). Signed in July, the OBBBA increased the exemption to $15 million per person, decreasing their estate tax planning needs. Despite this, the couple continued to pay $38,000 annually in premiums from taxable accounts, funds they preferred for personal expenses.

Before surrendering the life insurance policy back to the carrier for its $74,000 cash value, they consulted their planner, who advised exploring alternative options. The policy was offered to 21 institutional buyers, resulting in nine bids. The highest net bid returned $612,000 to the trust, a significant increase over the carrier's surrender value.

Such scenarios underscore the potential within the secondary marketplace for life insurance policies. Many policyholders surrender policies without recognizing their value, with financial advisors often overlooking life settlements as a planning tool. Until recently, large brokerage firms discouraged discussions on life settlements, though this perception has evolved.

The regulatory landscape for life settlements has matured, with 43 states now regulating these transactions involving notable institutional investors. Six states require carriers to inform policyholders of this option before terminating a policy. Elsewhere, the responsibility primarily rests with financial advisors.

Life settlements typically benefit individuals aged 70 or older owning permanent policies valued over $100,000, especially if their health has declined. Trust-owned policies, influenced by changes in estate tax legislation such as OBBBA, may be viable candidates. The initial exploration process incurs no cost, with brokers compensated from transaction proceeds, subject to statutory caps in most states.

Advisors must assess life settlement eligibility during policy reviews before any policy surrender finalization. This evaluation could present financial offers considerably higher than the carrier's surrender value. If no bids are received, surrendering remains an option.

Fiduciary advisors bear the responsibility of presenting life settlement options, empowering clients with informed choices. For investment advisory practices, understanding and communicating these options should be integral to service offerings. Aligning growth strategies with regulatory changes ensures compliance and client satisfaction.