There is a peculiar paradox in the financial advisory world: Ninety percent of seniors who lapsed a life insurance policy would have considered a life settlement had they been aware of the possibility. Yet 65 percent of financial advisors have never recommended a life settlement to a client, but claim they would do so under the right circumstances.
Unfortunately, each year more than $100 billion face value of life insurance lapses by seniors over the age of 65, mostly from a lack of knowledge that an unneeded or unaffordable policy may be sold. A life settlement is a strategy for helping your client capture some of those benefits rather than forfeiting them back to the insurance companies.
Based on conversations with hundreds of financial advisors and life settlement industry professionals, I believe a key explanation for this disconnect is that most financial advisors simply lack enough information about how to evaluate a life insurance policy as an asset in their clients’ portfolios. Like all other assets, these policies have a strategic purpose in addition to costs and benefits, and can be sold by the client if the asset is no longer serving its purpose.
Here are five common pitfalls that have been known to ensnare professional financial advisors when working with their clients on possible life settlement transactions:
5. Promising the moon
Most advisors instinctively understand the importance of giving their clients untarnished information about potential outcomes with financial planning strategies so they can make objective and even-tempered decisions. Unfortunately, in their excitement over the possibility of helping their clients uncover a hidden asset, some advisors make the mistake of promising them the moon — only to end up disappointed if the policy isn’t worth as much in the secondary market as they hoped. Strive to under-promise and over-deliver, rather than the other way around.
4. Turning a blind eye to premiums
If premium payments aren’t kept current on a life insurance policy, its value will already be diminished before you even begin to investigate the secondary market. In fact, many insurance companies won’t even bother to verify coverage, let alone process a change in ownership, if the policies are delinquent. Moreover, if your client ultimately chooses to sell their policy, it will be their responsibility to continue making premium payments until the policy ownership has officially changed.
The takeaway: Don’t turn a blind eye to premiums.