Dealing with Discomfort About Life Settlements

Nels GriffinFrontpage Article, News

Life and viatical settlements are becoming more and more well-known in the United States and other developed countries. Financial advisors and seniors who are retiring or already retired have more awareness that their life insurance policies are not something that they have and pay for, or don’t pay for and allow to lapse. Selling a life insurance policy can provide a senior a way to free themselves of an unneeded or unwanted life insurance policy without losing the money they have paid in the form of premiums – in fact, they can receive a single cash payment that is worth more than what they have paid in premiums.

There are numerous reasons why a senior might want to get rid of a life insurance policy – the premium payments may no longer be affordable for them, changes to tax laws might mean that paying for an estate tax might not longer be necessary, the recipients of any death benefit (such as a spouse or children) might not be alive anymore or may be financially stable enough to not need a death benefit. Finally, a senior might choose to improve their retirement lifestyle with the payout a life settlement would provide them.

But it’s a fact that many people – both financial advisors and their senior clients alike – are uncomfortable with raising or discussing the topic of life settlements because they are, essentially, a financial engagement that is directly connected with the client’s death.

There are several ways to deal with this discomfort.

First of all, both the financial advisor and the potential seller of the policy should keep in mind that life settlements are private property and, under US federal law, can be sold like any other form of private property. At the heart of it, it is a financial asset much like any other.

A life insurance policy is nothing more and nothing less than a contract between a client and an insurer,

Since a life insurance policy is a financial asset, it’s best to think about it rationally and with a cool head, not emotionally. Just as stocks and bonds shouldn’t be viewed emotionally when thinking about whether to sell them or not, so should the potential seller think about their life insurance policy.

Similarly, the decision to purchase a life insurance policy was driven by financial planning considerations. The fact that someone else (usually a large investment fund or company), and not the insured’s original intended recipient, will receive the death benefit upon the passing of the insured is not the point. Life insurance is a financial planning tool and should be evaluated like other financial assets – how is it performing, how will it continue to perform, and does it make sense to hold it instead of selling it? If not, then it should be liquidated.

In fact, we would go so far as to argue that every financial advisor has a moral duty, if not contractual obligation, to inform their clients about the possibilities that they have when thinking about what to do with an unneeded or unwanted life insurance policy. And clients owe it to themselves and their loved ones to consider their financial options carefully and without emotional prejudice, so as to choose the best course of action.

By viewing life settlements as just another financial asset in their portfolio, both policy holders and their financial advisors can bypass the discomfort that some people experience when they think about the fact that someone else will be profiting from their death. This kind of thinking is unhelpful to maintaining a stable financial situation or improving it, and is slightly hypocritical because the only thing changing is that the recipient of the death benefit with be someone other than the original intended recipient. When the insured signed off on their life insurance policy, they agreed to the idea that their chosen beneficiary would receive the payout when the insured person died.

All in all, both financial advisors and owners of life insurance policies who want to sell them should think about life insurance policies in a pragmatic, rational way. They should accept that discomfort and the “ick” factor regarding the idea that someone will profit from the insured’s death is misplaced and unhelpful to the holder of the policy. Without a level-headed, rational appraisal of the options available, an opportunity to get rid of an unneeded or unaffordable policy, and receive a payout several times larger than a simple surrender of the policy to the life insurance company would provide them.

View a life settlement policy as a rational financial planning instrument that can improve your or your client’s quality of life and financial situation, and it should become clear that discomfort with the idea of a life settlement is simply not a rational or reasonable reaction.