Each day we hear conflicting reports about the future of the U.S. economy. One day, it's good news. The next day, bad. Politicians suggest everything will be fine and pundits opine that the negative talk could lead to a self-fulfilling prophecy. Analyses, analogies and predictions are all over the map. What we do know is what clients tell us: Their overall confidence is shaky, particularly among seniors and those with a shorter investment horizon.
If you have been in the advisory business for more than a decade, this isn't your first time at the pre-recession hoedown. You have seen these kinds of markets before and know what to do from a portfolio management perspective. But in this inflationary landscape, generating income for a client via their life insurance policy is worth a look. As clients get older, premiums go up and the need for life insurance often changes. Inflationary pressures are being felt at all levels, not just with fixed-income retirees. Even high net worth investors are looking at the financial impact of their life insurance and wondering if keeping the policy in force still makes sense.
Here are reasons why a life insurance appraisal and eventual sale on the secondary market could make sense for your clients.
Eliminate premium expenditures and put more money under management
It's common for high net worth seniors to pay as much as $7,000 per month to keep policies in force, and this is hard cash being pumped into a universal or whole-life policy. If the need for insurance has changed due to the death of a spouse, divorce or the children are grown, and the client is feeling financial stress, then selling the policy often makes sense. Regardless of the appraised value of the policy, simply moving the $84,000 per year into assets under management will have a considerable positive impact. The proceeds of the sale could be used to offset current expenses or be added to the overall portfolio. This is an easy move to help clients re-allocate spending and grow their portfolio as an inflation hedge.
Money in motion
If a client's insurance needs have stayed the same, a sale on the secondary market may still make sense, mainly if the appraised value is attractive. For example, a client with a $1 million policy may be able to sell it for a $250,000 payout. Add the settlement plus the aforementioned "premium" to assets under management, and a senior client could extensively secure their final years.
Financial advisors are constantly pushed to put cash from a client's sale of a business or a significant life event into action. A life settlement is another option, allowing a client to sell a policy and then move the proceeds into a better-performing financial product — for example, an annuity, another insurance policy — or simply added to assets under management.
A life insurance settlement may afford financial freedom to a client they may not have had in the past. We have seen clients sell policies and then use the proceeds to fund their grandchildrens' educations, host family reunions, take dream trips and go on adventures. The byproduct is that a pleased client can become an excellent referral source.
The conversation starter
A policy appraisal is an easy way to start a conversation with a client about the options afforded by a life insurance settlement. An assessment can be created in a few minutes once a few documents are provided — typically, a policy illustration is a crucial piece. An appraisal is free to advisors and their clients and is markedly faster and easier than putting a policy out for bid through a broker, a process that typically follows an assessment.
The fear of a recession and the pain of inflation are already impacting clients. Viewing a life insurance policy as an asset that can hedge against rising costs or an economic downturn can set an advisor apart from the competition.
