Cash­ing Out

For clients con­cerned about fi­nan­cial short­falls in old age, ad­vi­sors may want to sug­gest they sell their life in­sur­ance.

Financial Planning - - Contents - BY DON­ALD JAY KORN

Clients con­cerned about fi­nan­cial short­falls in old age may want to con­sider sell­ing their life in­sur­ance poli­cies. Here’s how ad­vi­sors can help.

Some­times when an el­derly client needs funds, it can make sense to help them cash out of an un­nec­es­sary life in­sur­ance pol­icy.

The sec­ondary mar­ket for ex­ist­ing life in­sur­ance poli­cies, in which sales are known as life set­tle­ments, has been around for sev­eral decades. In this mar­ket, in­di­vid­u­als and com­pa­nies pur­chase ex­ist­ing in­sur­ance con­tracts from pol­i­cy­hold­ers at a dis­count to face value, hop­ing they’ll turn a profit when the in­sured dies and they col­lect the death ben­e­fit.

While pol­i­cy­hold­ers end up sell­ing the poli­cies at dis­counts, these trans­ac­tions can still make sense for some clients who no longer need them. Oc­ca­sions this might be ap­pro­pri­ate in­clude: when a spouse has passed away; when a client can no longer af­ford to pay pre­mi­ums or when clients are suf­fer­ing from ter­mi­nal ill­nesses and their life ex­pectancy has sud­denly nar­rowed.

Re­cent tax laws and im­prov­ing life-ex­pectancy es­ti­mates may make sell­ing a life in­sur­ance pol­icy an even more at­trac­tive op­tion for some clients in these sit­u­a­tions.

Clients with whole life poli­cies could profit from life set­tle­ments sim­i­lar to clients with other forms of per­ma­nent life in­sur­ance, such as uni­ver­sal and vari­able life poli­cies. Clients with term life poli­cies that are not con­vert­ible to a per­ma­nent plan may not find buy­ers will­ing to pay an ap­peal­ing price, since the buyer risks not be­ing able to col­lect a death

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