Turn Unneeded Policies into Cash: A Life Settlement Can Be a Better Alternative Than Surrendering a Policy

Life insurance planning isn't always about making sure someone has enough coverage. It's also about finding solutions for people who have too much. For them, it's a question of whether it's better to continue paying premiums in hopes of a gain at maturity or recoup some of that investment immediately by surrendering the policy. High premiums often put policy owners in a difficult position--especially if their insurance needs have changed. Corporate policy owners face similar concerns when dealing with key-person or split-dollar policies insuring departed executives or with insurance purchased to fund an obsolete buy-sell agreement. In some instances the best alternative is neither to hold the policy nor to surrender it. This article explains how CPAs can use a third option--a life settlement--to help eligible clients and employers dispose of unneeded life insurance policies now for more than the cash value rather than wait for the policy to pay off at the insured's death. LIFE SETTLEMENTS--WHAT THEY ARE AND AREN'T A life settlement turns insurance assets into cash, giving the original policyholder an amount greater than the cash surrender value in exchange for ownership of the policy. This option creates immediate revenue for companies or individuals holding unprofitable or unneeded policies. Life settlements are not viatical settlements, which terminally ill policyholders often use to raise quick cash. Rather, the typical life settlement candidate has a life expectancy of between 2 and 12 years. The best prospects for such transactions are age 65 or older, have experienced a change in their health and are insured by a policy with a face amount of at least $100,000. When an individual or business engages in a life settlement transaction, the amount it recoups is based on the policy's face amount and cash surrender value as well as other factors, such as the insured's health, age and the current policy premium. In a recent survey of accountants, attorneys, estate planners and insurance professionals by Maple Life Financial, a Maryland-based life settlement provider, 45% of respondents had clients over age 65 that had surrendered a life insurance policy for its cash value. Many instead could have qualified for a larger cash payment from a life settlement. Considering that cash surrender values average just 4% of policy face amounts, the decision to recommend a life settlement is an easy one for CPAs advising employers or clients unaware of the potential economic gain from these hidden assets. When providing financial advice and strategic information to clients or employers, CPAs have a fiduciary responsibility to identify effective ways to eliminate assets that burden the client or employer with unnecessary expenses. For CPAs in public practice, marketing and promoting life settlements can be easy; many accountants have clients that fit the life settlement eligibility profile. Any number of situations can create the need for a settlement, including * A change in interest rates that results in increased policy premiums. * A change in a policyholder's business situation. * A need for cash to fund medical or long-term care. * Improved estate liquidity, a decrease in estate value or elimination of the federal estate tax, making an existing policy unnecessary. * Bankruptcy. * Divorce. * Departing executives or business owners, making policies redundant. STEP-BY-STEP To start the process, select a professional life settlement broker to help get the best possible offers for the policy you wish to dispose of. Look for one with experience in the field and connections to major settlement providers. Exhibit 1, below, lists some questions CPAs should ask a broker in choosing one to represent a client or employer in a life settlement transaction. It's important to select a broker who represents institutionally owned and funded settlement providers. …