An interesting study reported in the Journal of Financial Planning discusses the behavioral finance implications of seniors who are no longer in need of a permanent life insurance policy accepting a life settlement offer in exchange for their policy. “The financial planning community considers many alternatives to suggest to their clients,” study author David Smith, PhD, CLU, ChFC, CFP® explains, and the study is meant to guide advisors in assisting their clients’ decision-making when comparing economic proposals.
While at Geyer Law, our Indiana estate planning attorneys do not sell life insurance, instead working with each client’s insurance advisors to coordinate their policy choices with their estate planning, life insurance ownership is often an important aspect of their overall financial and estate planning. In this Geyer Law blog, we several times discussed an estate planning technique in which clients draw down their IRA balances, using those withdrawals to pay annual life insurance premiums for policies held inside Irrevocable Life Insurance Trusts.
But needs – and tax laws – change over the years, and, while retirees may have originally purchased life insurance to pay off a mortgage upon their deaths, to provide for grandchildren’s education, to pay estate taxes, to finance a business transaction, or even as a source of future income, these needs may no longer be present, and selling the policy might enhance their income rather than continuing to represent a cost factor.
In a life settlement, a life insurance policy is sold to a third party, with the buyer maintaining the policy until the death of the insured (then collecting the death benefit). While this technique may or may not prove appropriate in all client’s estate planning, life settlements represent one more tool that might help clients better match their planning decisions to their changing circumstances and needs.
– by Ronnie of the Rebecca W. Geyer Blog Team