The buyer wants a return and has to keep the policy alive long enough to garner an acceptable return. Generally, the older the insured or the worse the insured's health, the more the owner can get for the policy because the new owner expects to get the death benefit sooner, boosting the return on the buy.
Keep in mind that if one is that unhealthy, it can be better to take other steps to keep the policy in force so the family can get the full tax free death benefit rather than a smaller, probably taxable, amount of sale proceeds. Some families can pull this off.
One thing to look out for when discussing selling a policy is many people find the idea disturbing because they feel the buyer will be wishing ill upon the insured. Regulators have some concerns about this dynamic as well. Nonetheless, a sale can be a legitimate option.
6. Get some help. This is one of those other steps to which I just referred above. We have seen family members fund a policy because an unhealthy insured was unable to do so. The death benefit more than makes up for the outlays. This is not done as an “investment” by any means. We usually see it as a way to make sure mom gets a needed death benefit from a policy that would be a burden to maintain. Be sure to verify the beneficiary designations are correct and be aware that the creepy factor can be even more problematic when the emotions that go along with caring for an ailing family member are added to the mix.
7. Donate it. Like other assets, a life insurance policy can be donated to a charity and a charitable tax deduction received. Not all charities are equipped to handle all policies and one could argue other assets would make a better donation but it is a viable option for some.
8. Modify it. Many policies allow modifications like reducing the death benefit. Sometimes such a change will allow the policy to stay in force much longer or reduce the premiums needed.
Each of these options come with their own twists and turns. How does one decide what to do?
The starting point is to get all the needed information to assess the "health" of the policy. We would request an "in force ledger statement" and a copy of the policy and go from there.
Life insurance is a contract with specific and often complex provisions that dictate how the policy works, what the costs are, how the costs can change, and what and how modifications can be made by the owner or the insurance company.
You don’t have to sell insurance to be of service to clients with respect to their insurance policies. First, it is acceptable to insurance regulators for financial planners to give generalized advice about life insurance options or the need for life insurance. They will get more particular if you dive into specifics about an insurance contract when not licensed to do so.
Here in Florida, to give specific advice about a life insurance contract, you can either become licensed to sell life insurance as an agent or, as we have done and some other states allow, have a person on staff obtain and maintain an “unaffiliated” agent’s license. It is somewhat analogous to choosing to be a registered representative of a broker-dealer vs. an investment advisory rep when working with securities.
Risk management is a cornerstone of financial planning. Changing life insurance needs should not be ignored. Sifting through this can be very complex but that is why doing so has value. We often find it is well worth the trouble and appreciated by clients.
Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].