Here’s a look about what happens when two common financial arrangements intersect.
I received a call from a fiduciary the other day inquiring about selling a life insurance policy in an irrevocable life insurance trust (ILIT). This question comes up fairly often.
Specifically, here are the questions this fiduciary asked:
1. Is it permissible for a trustee of an ILIT to sell the policy?
From the perspective of the life settlement market, the short answer is — yes. Clearly, the trustee needs to be sure that selling the policy is in the best interest of the trust and beneficiaries. The proceeds of the sale go to the owner of the policy.
2. Does it depend on the specific provisions of the trust?
The buyer will want to see a copy of the trust. Most policies sold are trust-owned.
3. Does the fact that a policy is owned by a trust in any way affect its value in the secondary market?
The ownership status in no way affects the value. Buyers evaluate trust-owned life insurance policies in exactly the same way they evaluate individual-owned life insurance policies. The numbers are the numbers.
Why would a trustee wish to sell the life insurance policy? There are many reasons why this may be advantageous, but the reality is that the policy no longer serves its purpose and is no longer wanted or needed. Perhaps, there has been a decrease in estate value. Or, perhaps the policy itself is “blowing up” — meaning the cash in the policy has been exhausted because the interest has not been credited as high as illustrated decades ago. Or, the premiums are so high, the policy is no longer affordable. Perhaps a spouse has passed away.
The reality is hundreds of thousands of policies are lapsed each year because clients do not know a life settlement exists, or the benefits that a settlement can bring. Remember, life settlements have been legal since 1911 and are highly regulated by departments of insurance across the country, giving consumers the legal protections they deserve.
Life settlements are not for everyone — nor should they be. But, if you and your client have decided that lapsing or surrendering a policy is the best option for them, take a look at a life settlement. There may be more value for your client in a settlement. Studies show, on average, life settlements garner three to five times cash surrender value, and yes, even term policies can be sold.