With changes to many tax laws looming at the end of the year, a life insurance settlement could provide an opportunity for clients to not only donate to a charity but also reap tax savings under current rules.
But selling a policy on the secondary market before redirecting the proceeds to a charitable donation is just one way to use a settlement, according to Doug Himmel, a managing partner with Melville Capital, an advisory practice that represents policy sellers in deals with institutional investors and other buyers.
The transactions can also enable policy owners whose
That's why it's important for policyholders to work with a licensed advisor acting in their best interests, rather than a representative for one of the buyers trying to purchase the policy directly, Himmel said.
Last year, life settlement sales netted an average of 6.5 times the amount of the policies' cash surrender value,
"This is another reason why people would evaluate their existing life insurance and look to make a decision whether they continue funding it," Himmel said. "The way we look at these changes is, it's giving people another reason to evaluate the necessity for the existing policy."
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What to consider when it comes to life settlements
Over the past four years, life insurance settlement sellers have received more than $2.5 billion above their potential payouts in a lapse or surrender, the advocacy group's sales data showed. Though the 2,699 transactions documented by the annual report amount to a tiny portion of the 11 million life insurance policies held by U.S. consumers, the deals netted sellers over $600 million in proceeds.
The factors for financial advisors and their clients to consider when thinking about a life settlement,
- the client's ongoing insurance necessities and how the deal could affect them,
- whether borrowing against the policy or other alternative means of liquidity could be an option,
- the taxes on any lump sum payments,
- the possible impact on other family members, and
- how much of their health information may become available to other entities.
The regulator recommended looking at BrokerCheck or state insurance agency websites to see whether a broker or a buyer may be registered, among other steps. Privacy protection, transaction costs and the question of whether a seller is "being pressured to make a fast decision," should also figure into the equation, FINRA's guide said.
"If you feel that you're being subjected to high-pressure sales tactics or other aggressive advertising, marketing and sales efforts, beware," the regulator said. "A legitimate investment professional will provide clear answers to your questions and will give you the time you need to make an informed decision."
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Get the best deal
Such risks explain why advisors, insurance agents, estate planning attorneys and other professionals seek out the help of experts like Himmel to decide on their best course of action with a policy. But institutional investors such as private equity firms and hedge funds see a lot of value in life settlements as non-correlated assets, he noted. The process works much differently than responding to a television ad with an 800 number to call.
"We run an auction and take it out to the entire marketplace of accredited institutional licensed entities to get the highest and best price at that place and time," Himmel said. "Their goal is to buy the policy directly from you without getting any advisors in the mix to give any holistic advice."
