Selling Underperforming Assets In The Secondary Market For Life Insurance
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An Irrevocable Life Insurance Trust, or ILITs, has been a valuable tool for financial planners and advisors for decades. ILITs protect the proceeds from a life insurance policy from being included in the estate of a decedent or, many times, are designed to protect the recipients of the life insurance policy’s death benefit from themselves.
$5.45 Million is the current (2016) estate tax exclusion, and up until recently there were concerns that the exclusion would be lowered, subjecting many estates to excessive tax burdens upon the transfer of value from one generation to the next. Considering the current interest rate environment and corresponding poor performance against illustrated values of Permanent Life Insurance (mainly Universal Life Insurance), there are many consumers who maintain a life insurance policy that has dwindling or stagnant cash value, but is somewhat trapped inside of the Irrevocable Life Insurance Trust (ILITs) itself.
To make matters worse, some Life Insurance Companies have increased insurance premiums on certain tranches of business, and the increases are for the most part on policies sold in the 1980s and 1990s. This impacts the oldest policy owners disproportionally. In addition to the strain that increasing premiums can have on the overall financial health of an ILIT, when you consider that often times the underlying projected estate tax liability has been diminished or disappeared altogether, selling the life insurance policy for cash as a Life Settlement in the secondary market for life insurance is a viable alternative in many situations.
In many situations the need for life insurance to protect the estate has not vanished altogether but has simply diminished. Selling a portion and retaining a portion of the death benefit can have many advantages for someone in this situation. The sales proceeds from the partial sale of a life insurance policy can be utilized to invest in other higher yielding alternatives, and the institutional fund that purchases the policy is then responsible for paying all of the premiums to keep the policy in force until maturity. This eliminates that expense for the consumer, and assures there is some life insurance going forward to benefit the trust.
Changing needs as we age are the primary reason that so many flexible provisions have been constructed into Universal Life and other flexible premium adjustable life products, but there is no provision or option availed by Life Insurance Companies that permit you to sell a portion of your life insurance policy back to the company for more than the expressed cash surrender value and eliminate premiums without being disabled.
More than 20 Trillion dollars of life insurance death benefit is in-force and if historical percentages apply going forward, more than 80% of that amount will never pay out in the form of a death benefit. It is more common than not for a policy owner holding a policy inside of an irrevocable life insurance trust to simply lapse or surrender their life insurance policy once they no longer need it or if it becomes unaffordable. A life settlement or a partial life settlement, where you or your client can retain a portion of the death benefit yet pay no more premiums, has become a powerful financial tool for advisors and consumers with changing needs.
The cost of long term care is increasing and home health care is typically not covered and needs to be paid out of pocket. By selling all or some and retaining a portion of your life insurance policy, you may be able to find new life in the form of a hidden cash value, inside your existing life insurance policy, that can be best applied towards higher yields or current needs.
Do not reduce the face amount, cancel or lapse a life insurance policy inside of an ILIT without first having it appraised in the secondary market for life insurance as a life settlement. Statistics and surveys form LISA (Life Insurance Settlement Association) indicate that most consumers do not know of this option and once informed; 90% of people that lapse or surrendered their life insurance policies would have explored the sale of their life insurance policy for cash as an alternative.
There is no expense or obligation to have a life insurance policy appraised. The hidden value inside of your existing life insurance policy, which is itself inside of an Irrevocable Life Insurance Trust, can oftentimes be repurposed to better meet your changing needs.