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The Role of Life Settlements in Estate Planning

Life insurance is a mainstay in estate and business succession/buy-sell planning. Despite its widespread use, however, many advisors and their clients focus on a policy’s death benefits or current cash surrender value (CSV), rather than seeing the value of the life insurance policy as an investment asset with an existing fair market value (FMV). Through consideration of a life settlement, advisors and their clients can appropriately value and potentially monetize life insurance policies to solve immediate financial or non-tax planning needs.

Clients expect their advisors to know and inform them of all desirable planning options, particularly if those options can provide them with additional current or future value. In this Trusts & Estates article written by Todd Steinberg, D.C. Trusts & Estates Practice Leader, and Jon Mendelsohn, chief executive officer at life settlement brokerage firm Ashar Group, the authors outline key elements estate planning lawyers and wealth advisors should consider when advising clients regarding life settlements, including the following topics: 

  • Never cancel, surrender, transfer or lapse a policy without first having it independently appraised and/or valued for a potential life settlement.
  • A life settlement is an asset sale, not a traditional life insurance transaction. It just happens to be a life insurance policy being valued or sold.
  • Before providing any information to a life settlement company, ask whom they’re licensed to represent—the policy owner or the investor. Understand the applicable fee structure and commission arrangements, while recognizing the risks to the maximum sales price from any “hidden fees” and undisclosed fee sharing with brokers or buyers. Understand the potential range of value between a policy auction versus no auction (with the desired goal to maximize the highest value for the policy). Appreciate the difference between gross and net sales price.