Do you consider yourself an expert on life settlements? 

According to a 2015 survey published by WealthManagement.com 4 out of 10 financial advisors said they weren’t. Of those familiar, only 11% had recommended a life settlement or assisted a client with one.

This means a significant number of financial advisors aren’t bringing enough financial information to the table for their clients.

3 Misconceptions Financial Advisors Have About Life Settlements 

There are a few misconceptions that stop people from recommending life insurance settlements or even learning more about them themselves. Let’s clear the air of those. 

1 – Transferring ownership of life insurance is illegal. False.

Transferring ownership of life insurance is legal and is a regulated process. Most insurance companies can’t cancel a life insurance Policy after two years as long as the premiums are being paid. The beneficiary of the policy does not need to have an insurable interest in the insured. This means someone can confidently take over the policy without getting robbed of their investment.  

2 – Life Settlements aren’t worth it after taxes. False.

The Tax Cuts and Jobs Act of 2017 (TCJA) has both simplified the taxation process of life settlements and increased the payout from selling. This new law changed how profit is defined to the IRS. You pay taxes on the money from a life settlement that’s a profit. 

The profit is now defined as the difference between the premiums you paid and the cash payout you receive from selling the policy. Some of this profit is taxed as ordinary income and some as capital gains. 

This change in taxation provides a significant benefit to people choosing to sell their policy, making life settlements worth the transaction after taxes. 

3 – You need to be an expert to recommend settlement options. False

Life settlement brokers do all the heavy lifting. As long as you understand enough about life settlements you can recommend them when appropriate to your clients. You can also recommend a life settlement broker to make sure they get the most out of their policy.  

What Financial Advisors Need to Know About Life Settlements 

When you understand how life settlements work you can stop your clients from making the costly mistake of surrendering their policy. More money comes from selling a policy than surrendering it.

Life insurance companies make their money by policies lapsing. 88% of all universal life insurance policies are lapsed or surrendered. This happens without payment of a death benefit. As a financial consultant, you need to make sure your clients realize this and don’t miss out on the opportunity to get money from their policy.  

Life Settlement Brokers Get You More Money

A life settlement broker invests thousands of dollars of their own company’s funds into each of their life settlement clients. The qualifications and underwriting process involves extensive communication with insurance companies and doctors’ offices. They acquire and prepare all of the documents with the needed signatures. 

They are financially invested and prepared to deal with insurance companies who drag their feet with life settlements. Understandably, since policies lapsing are how insurance companies make their money. 

Once the underwriting process is finished, the broker will begin accepting bids. This process involves communication with different buyers until the highest offer is accepted. 

The alternative is working with a direct buyer. Using a direct buyer will get the policy sold quickly. However, you will be accepting a lower offer in this scenario. Life settlement brokers can get you a substantially higher offer but it takes time to complete the bidding process. 

Who Qualifies for Life Settlements?

A life settlement calculator can give you an idea of whether a policy can qualify for a life settlement. There are three elements to keep in mind as you are considering this option for your clients:

• The client must be at least 70 years old or have significant health impairments. 
• The face amount of the policy should be at least $250 K. 
• The policy needs to be in force for at least 2 years and some states require 5 years. 

All Types of Life Insurance Policies May Qualify for a Life Settlement 

Different types of life insurance policies have slightly different processes when it comes to settlements. Whole, universal, and term are the most valuable policies. Term life policies can be converted into a permanent product and then they may qualify for a life settlement.  

Convertible term life policy – This type of policy you can convert or renew without any additional medical qualification. 

Non-convertible term policies – These are harder to sell as they are a much higher risk for the buyer unless there is a terminal illness. 

Variable life policies – These policies are less desirable if monthly premiums are too high and they have the highest fees involved.  

Lapsed life insurance policies are an expensive mistake, and it’s your responsibility as an investment advisor to stop your clients from making such a mistake. You only need to know enough to make sure your client isn’t missing out on settlement options. So keep life settlements in your toolbox to create the best financial situation for your clients.