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161 Tr. & Est. 42 (2022)
The Role of Life Settlements in Estate Planning: Capturing Unrecognized Value in Insurance Policies

handle is hein.journals/tande161 and id is 250 raw text is: By Jon B. Mendelsohn & Todd 1. Steinberg The Role of Life Settlements In Estate Planning Capturing unrecognized value in insurance policies ife 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. The life settlement option is particularly relevant when: (1) a client otherwise plans to discontinue paying premiums; (2) the policy's cash value is diminishing; and/or (3) the client outlives or no longer needs the insurance coverage for its intended planning purpose. Life settlements also can support exit strategies for underfunded (or poor performing) policies owned in irrevocable insurance trusts and other premium finance and split-dollar transactions. For more details on the reasons for considering life settlements, see Sample Case Studies, p. 43. 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. Understanding and advising on life settlement options can avoid difficult situations when clients, beneficiaries or family members subsequently learn of life settlements and ask critically if the option was explored before a policy cancellation or surrender. In addition, for policies owned by trusts or business entities, fiduciary liability (or the expense of defending an action) could apply to the failure to explore alternatives that may have provided substantially more value for the policy (and thus more available value for the trust beneficiaries or business owners). In addition, fiduciaries need to be prepared to justify why they did or didn't choose the life settlement option if beneficiaries later question that decision. Life Settlement Basics A life settlement is the regulated sale of a life insurance policy to a third-party institutional buyer for an amount greater than the policy's CSV but less than its current death benefit. After aggregating data, the process can take 30 to 90 days. Who buys the policy? Life settlement buyers are institutional investors, like private equity firms, pension plans and reinsurers (that is, not individuals). These buyers purchase life insurance to create large portfolios of policies that act as a non-correlated investment to counterbalance the performance volatility of the equity and bond markets. In addition, unlike the unregulated viatical market of the 1990s, which served only terminally ill individuals (those expected to live less than two years), the institutional buyers in the current life settlement market are highly regulated.' Why consider? Clients who are considering canceling their life insurance might look into life settlements as an alternative that might capture significantly more value than a surrender for net cash value. On average, a policy eligible for life settlement can have a value worth five to 10 times more than its CSV. Further, unlike when issuing a policy, the 42 / TRUSTS & ESTATES / trustsandestates.com / APRIL 2022

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