The Value of Life Settlements in Financial Planning
Last fall, a certified financial planner reached out to me regarding a couple of clients, both aged 78. They owned a $2 million guaranteed universal life policy held within an irrevocable life insurance trust (ILIT) that was established in 2009 to cover estate taxes when the federal exemption was $3.5 million per person.
The One Big Beautiful Bill Act, signed last July, raised the exemption to $15 million per person, eliminating the couple’s estate tax concerns. However, they were still paying annual premiums of $38,000, sourced from taxable accounts, which they would have preferred to utilize for personal expenses.
Upon considering surrendering the policy back to the carrier for its cash value of around $74,000, they were advised to hold off. Subsequently, we presented the policy to 21 institutional buyers, receiving offers from nine. The highest bid amounted to $612,000 net to the trust after broker commissions, nearly eight times the carrier’s surrender value.
While the outcome was not uncommon, the timing of the advisor’s call before the surrender forms were signed was noteworthy.
Secondary market value
As a viatical broker, I often come across seniors who surrender or lapse life insurance policies with considerable secondary market value. Many times, the life settlement discussion never occurs, not due to negligence but because advisors were not exposed to it as a planning option.
Until the 2020s, major broker-dealers discouraged representatives from broaching the topic of life settlements. Although this stance has shifted, many current advisors have not incorporated it into their practices.
Despite annual gross market potential for life settlements estimated at $224 billion in a 2025 study by Conning, actual settlements in 2024 totaled only $3.4 billion in face value. This disparity highlights the significant amount of money that remains unclaimed due to policy lapses or lack of review.
Fiduciary considerations for financial advisors
With 43 states now regulating life settlement transactions and reputable institutional buyers participating in the market, fiduciary advisors must consider initiating life settlement conversations with clients. It is crucial for advisors to align with ethical standards such as the CFP Board Code of Ethics and the Investment Advisers Act of 1940.
Life settlement pros and cons
Seniors aged 70 or older with permanent life insurance policies exceeding $100,000 can benefit significantly from a life settlement, especially if their health has deteriorated since policy issuance. Clients with trust-owned policies that have become obsolete due to changes in tax laws, such as the OBBBA’s exemption increase, can also benefit.
Exploring a life settlement typically incurs no cost for policyholders, as brokers receive their fee from the proceeds, subject to statutory caps in most states. While the decision to pursue a life settlement may result in heirs receiving a reduced death benefit, policies that no longer serve their original purpose or have secondary market value can be considered for settlement.
It is imperative for financial advisors to introduce the option of a life settlement during policy reviews, allowing clients to make informed decisions about their insurance policies.
