Life Settlements Within the Fiduciary World

Greg Kizer, CAIA

Vice President of Marketing

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We hear it all the time from Trustees managing ILITs. Your client no longer wants that life insurance policy they took out years ago for estate planning purposes. The original reason for the policy is no longer applicable and now they want to cease paying premiums (and trust fees). Your client is comfortable with surrendering the policy back to the insurance company without understanding all available options, or perhaps you have an agent or financial advisor pressuring you to sign a pile of paperwork to sell the policy via a life settlement (and if you don’t sign them immediately you will lose the offer). Even if you make an informed fiduciary decision and decide to move forward with a life settlement, how do you know the policy sale will be handled with a fiduciary standard of care?

As a fiduciary, first and foremost it is important to be aware of all policy remediation options, including life settlements.  A life settlement is the sale of a life insurance policy to a third party for a value in excess of the policy’s cash surrender value, but less than its face value, or death benefit. The policy owner receives a cash payment, while the purchaser of the policy assumes responsibility for all future premiums and receives the death benefit upon the death of the insured. While RIC advocates maintaining life insurance if your client has the ability and willingness to fund the policy and if it still plays a role in the financial or estate plan of your client, life settlements may be suitable if you have narrowed your remediation options down to surrendering the policy back to the insurance company or letting the policy lapse on an insured typically over the age of 75.

So why are life settlements becoming more popular for ILITs? More than 40% of the trust owned life insurance policies RIC reviews each year are identified as being inadequately funded — either lapsing prior to maturity or maturing with a significantly reduced death benefit. Often a much higher annual premium (versus the original planned premium) would be required to prevent a future lapse of the policy and more often than not the increased premium is unaffordable. Instead of a lapsed policy or receiving only the remainder of the cash surrender value, life settlements may enable you to maximize the value of the asset. Additionally with the tax laws effective in 2018, the ambiguity around calculating the tax for a life settlement transaction was eliminated and the overall tax liability has been reduced making life settlements more attractive. Correspondingly, 43 states and the territory of Puerto Rico now regulate life settlements, providing disclosures and protections for policy sellers. This confluence of more and more underfunded policies combined with the changes in the tax and regulatory landscape make life settlements an increasingly common remediation tool for fiduciaries.  

While life settlements may seem like an excellent option in the right situation (imminent lapse, unaffordable premiums, exploring policy surrender), it should be noted that not all policies qualify.  Generally, the policy must meet the following criteria to be considered a candidate for a life settlement:

  • The insured(s) typically needs to be over the age of 75 (unless serious health issues are present).
  • The policy’s face amount needs to be $100,000 or more.
  • The policy must be transferrable (typically in-force for more than 2 years)

The projected cost of insurance charges, size of the net death benefit and life expectancy of the insured(s) will ultimately determine a policy’s secondary market value. Given all of these factors affecting the marketability of each policy, as Trustee it is important to request a preliminary life settlement evaluation (pricing analysis) prior to letting a policy lapse or be surrendered to determine if it is even a viable option for your client. Additionally, a preliminary life settlement evaluation also serves as documentation that the sale of the policy was investigated as a remediation option, demonstrating due diligence in your role as fiduciary.  It should also be noted that the life settlement transaction can take up to four months to complete so it is important to explore well in advance of the policy falling into a grace period.

In the event a policy is a candidate for sale and makes sense for the trust, what are the next steps? As a fiduciary, it is important to work with one life settlement broker on each transaction. Due to state licensing requirements, brokers typically submit policies to the same reputable buyers. Completing applications with multiple life settlement brokers can create confusion amongst potential buyers, as they’re approached by multiple brokers with the same policy, leaving uncertainty as to who is in control of the case. In working with one broker to facilitate a smooth process from start to finish, it would also be prudent to take the following actions:

  • Request the fee schedule from the life settlement broker up front so there are no surprises.
  • Obtain the bid history to ensure the policy was marketed to multiple buyers versus going directly to only one company.
  • Once the final high offer is in place, consult with a tax professional to determine any tax liability.
  • If the decision is made to move forward with the offer, ensure an indemnification agreement is signed by all grantors and beneficiaries, in addition to completing the closing documents.

While life settlements can provide exceptional value to your clients and trusts, it is important to work with an experienced partner who can assist you in navigating the process and who meets a fiduciary standard of care. RIC can further help you and your clients understand when life settlements are suitable as we are 100% focused on the fiduciary industry.  The process typically starts with obtaining a preliminary life settlement evaluation to determine if a policy is a reasonable candidate for sale on the secondary market.  For this evaluation, all that is needed is a recent illustration showing the necessary annual premium to carry the policy to maturity (typically age 100 or greater).

To request a preliminary life settlement evaluation or if you have any questions regarding life settlements, please reach out to Greg Kizer at greg.kizer@ricomaha.com or 402-513-3676.

RIC is a nation leading independent Fiduciary Risk Manager that partners with over 200 trust organizations and law firms across the country.  We manage over 15,000 Trust Owned Life Insurance policies and provide ongoing reviews, administration solutions, and policy remediation services.

Other RIC Fiduciary Services:

Closely Held Business Valuations for entities held in Trusts, IRA’s, and 706/709 appraisals.                    

Will File Platform to help fiduciaries manage their records when named as Executor or a future trustee.


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