About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline

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

What Is HeinOnline?

HeinOnline is a subscription-based resource containing nearly 3,000 academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Contact us for annual subscription options:

Already a HeinOnline Subscriber?

profiles profiles most