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Three Times A Life Settlement Makes Sense

The reason to consider a Life Settlement of an existing life insurance policy is to be sure you don’t leave any money on the table. Many clients don’t realize they might be sitting on an asset that can be turned into cash – the sale of an unaffordable or unneeded life insurance policy.  (We have some examples below.)

Prior to our becoming totally independent, however, we – like so many advisors and firms – were prohibited from even discussing Life Settlements as an option for a client. Although that grated on me, we seldom ran across a situation where a Life Settlement was something to consider. When we did, it was referred out to someone else who could advise and assist the policyholder. As an independent advisor, we can now help monetize a policy that no longer fits the client’s needs.

Here at Stratus, our focus is to help keep existing life insurance policies in effect rather than go away. (That’s normally the better solution for a beneficiary.)  We would never recommend letting go of a policy the owner needs and can afford to maintain. If a client needs the insurance and can afford it, they should keep it. But – for insureds over the age of 65 – a policy should be reviewed before it’s allowed to lapse for nothing.

With that as our starting point, you can correctly infer we don’t lightly recommend letting a policy go. However, when it fits, a life settlement really fits. Here’s why:

Problem

Things change. There are situations where the original purpose of the policy no longer exists. More often, we find that continuing the policy is no longer possible because the cost has become too large to continue. At that point, the only two options that used to be available were to cash it out (if there was cash in the contract) or walk away and let it go for nothing.

Solution

If an independent policy review helps determine the end of the policy is near, a life settlement review needs to be part of the due diligence. Here are those examples mentioned above:

Outcome

A 73 year old male had a $1,000,000 term policy with increasing premiums that just had to go. Instead of being stuck in a bad situation, his life settlement provided him with $70,000 in cash. He was then able to fund a more affordable policy.

Another 73 year old sold his business. There was an $8M key man policy. Before he let it go, a life settlement was explored. He got a check for over $780,000. (This was separate from, and in addition to, what he’d received from the sale of the business.) He didn’t need more insurance. Whatever he did with the extra money had to make him smile.

Our third example is a 77 year old male with a $3.8 million policy. With the increase in the federal estate tax exemption his policy was no longer necessary. He decided to settle, and was paid $893,000 for the policy, which he then used to fund his grandchildren’s education.

When it fits, a life settlement really fits. These three examples created over $1.7M of real cash for the policyowners. Because of their caring and knowledgeable advisors, they didn’t leave that money on the table. Before a policy is allowed to lapse-find out what it’s worth.

At Stratus Financial Partners, we’re making the world a better place-one policy at a time.

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