An Irrevocable Life Insurance Trust (ILIT) has long been a crucial tool for financial planners. It ensures that life insurance proceeds stay outside the taxable estate of the deceased. This, in turn, protects the beneficiaries from creditors and other potential issues. However, given today’s economic climate, many life insurance policies are underperforming. These once-powerful assets might now carry dwindling cash values, making them a burden rather than a benefit.
Life insurance companies have raised premiums on older policies, particularly those from the 1980s and 1990s. This has particularly affected older policyholders. The rising costs can strain the financial condition of an ILIT. Moreover, changes to estate tax laws have lessened or even eliminated the projected tax liabilities that these trusts were meant to offset. In such cases, selling the life insurance policy through a Life Settlement can be an excellent alternative.
There’s another side to this as well. For some, the need for life insurance hasn’t disappeared; it has merely decreased. Selling a portion while retaining the remaining coverage offers a beneficial compromise. The sale proceeds can be reinvested, potentially in higher-yielding assets, bringing greater financial flexibility. Meanwhile, the buyer of the policy assumes the responsibility of paying future premiums, freeing the policyholder from this expense.
For those of us with changing needs, flexible provisions in Universal Life policies are essential. Yet, life insurance companies do not offer an option to sell back a part of your policy for more than its cash surrender value without being disabled. This limitation leaves policyholders seeking alternative solutions to optimize their financial planning strategies.
Prominent statistics reveal a significant issue. More than 20 trillion dollars of life insurance death benefits are currently in force. A staggering 80% of this will never pay out as a death benefit. Many policyholders owning assets in an ILIT often let these policies lapse or surrender them once they become unnecessary or costly. This leads to a substantial loss of potential value.
A life settlement, or even a partial life settlement, can provide much-needed liquidity. Selling the policy means no more premiums and possibly retaining part of the death benefit. This alternative has gained popularity among advisors and clients who have evolving financial requirements.
The increasing costs of long-term care and home healthcare, often not covered by insurance, add to this necessity. By selling or partially selling your life insurance policy, you can unlock hidden value within it. This can be redirected towards better current uses, such as paying for healthcare or investing in assets with higher returns.
It’s essential to highlight the importance of appraising a life insurance policy before planning to reduce, cancel, or lapse it. Many are unaware of the potential cash value these policies hold when sold in the secondary market. Surveys show that once informed, a significant number of policyholders would consider a life settlement as opposed to simply allowing their policy to lapse.
Having your policy appraised doesn’t come with any cost or obligation. Discovery of the hidden value within can significantly aid in repurposing the policy to meet current needs more effectively.
We believe in empowering our clients through transparent and informative processes. Reach out to us to explore how your underperforming ILIT policy can be converted into liquid assets to serve your needs better.
