Advisors Weigh Risk, Opportunity in the Life Settlement Market

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Are your clients tired of paying high premiums on a life insurance policy that no longer offers what they need?

Don’t just let it lapse: It may be worth more than they realize. Life settlements, or selling policies to third parties, offer holders a chance at a higher return than they might get from simply surrendering them. There are many reasons to sell a life insurance policy, according to Bryan Nicholson, executive director of the Life Insurance Settlement Association, from bolstering retirement income to covering the cost of long-term care. There are likewise reasons to be cautious when weighing options, especially if clients experience aggressive sales tactics. What’s clear is that financial advisors with knowledge of the life settlement process can help see them through.

“From our experience, it’s worked out well in the right situations,” agreed Joon Um, advisor at Secure Tax and Accounting in Beverly Hills. “It can be a bit involved with underwriting, life expectancy reviews and multiple offers, so it’s not always quick.”

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Before the emergence of the modern life settlement market (which is an interesting story in itself), individuals had to surrender their policies or wait for them to lapse in order to get out. Today, they can solicit cash bids on their policies from institutional buyers who analyze factors like the insured’s age, health and policy premiums to submit competing offers. The process frequently results in a payout greater than the policy’s cash surrender value.

According to 2024 market data from the Life Insurance Settlement Association,  sellers received a multiple of 6.5-times the cash surrender value, Nicholson said. The data also found:

• “The average individual payout was $222,807.

• In aggregate, sellers were paid $511 million more than they would have received by simply surrendering or lapsing their policies.

The main things to watch are taxes, fees and making sure the client is fully comfortable giving up the policy, Um told Retirement Upside. In some cases, keeping or restructuring the policy makes more sense, so it’s important to have an open mind. “Overall, it can be a good option, but very case-by-case,” Um said.

A Missed Opportunity. While not everyone will be well-served by life settlements, Nicholson said, significant benefits are being overlooked: Each year, roughly $50 billion in policies that could qualify for life settlements are instead lapsed or surrendered. This happens most often because the policyholder was simply never told another option existed.

The clearest candidates are policyholders whose circumstances have changed materially since the policy was originally purchased. In practice, that often looks like someone over the age 65 holding a large universal life policy, where premiums have increased over time and the policy no longer fits their financial priorities. Policyholders who are post-mortgage, whose children are financially independent, or whose estate-planning priorities have shifted are also natural candidates. Funding long-term care is another common use case, but whatever the goal, proactive planning is key.

“Advisors should treat periodic policy appraisals as a standard part of the retirement planning conversation, not just a reactive step taken under financial pressure,” Nicholson concluded.

This post first appeared on Retirement Upside. To receive actionable insights for financial advisors guiding clients through the strategies, products, and policy shifts shaping retirement outcomes, subscribe to our free Retirement Upside newsletter.