Many fiduciary wealth advisors are unaware that 90% of cash value life insurance is lapsed or surrendered before ever paying a death benefit, even after significant capital paid in to maintain the policy. Why so high a lapse rate? Because the longer an insured lives, the less financial sense a cash value policy makes. And we're now seeing what will likely be a tsunami of policies owned by people in their 80's and even 90's who simply cannot afford the policies, as years of low interest rates result in skyrocketing premiums to keep the policies in force.
While the implications of rising premiums are less dire for affluent, HNW, and UHNW policy owners, the financial math is the same...the policies make less and less sense to maintain for insured past 70 years old.
Proactive wealth advisors should be engaging their clients about such policies to ensure that in the event that clients no longer wish to maintain those increasingly expensive, declining return policies, they can, instead, monetize them to the significant benefit of the policy owner and of the advisor, having delivered a significant value-add service AND growth AUM.
Below is a link to a September 2018 Wall Street Journal article that details the coming wave of older UL/VUL policies whose owners are experiencing exploding premiums, borne of a long decline in interest rates.
Universal Life Insurance, a 1980s Sensation, Has Backfired
#lifeinsurance #wealthmanagement #lifesettlements #1908advisors
"Opportunity is a haughty goddess who wastes no time with those who are unprepared" - George Clason
“It is not often that a man can make opportunities for himself. But, he can put himself in such shape that when or if the opportunities come, he is ready.” - Theodore Roosevelt
Trustees (and wealth advisors to grantors) of life insurance Trusts are certainly well aware of the “Prudent Trustee Rule" of the Uniform Prudent Investor Act (UPIA), requiring trustees to maximize benefits and minimize costs of the policies in the Trust. What many are less aware of - or, more precisely, the implications of - is the responsibility to investigate, monitor, and manage those policies. What that actually means is that the Trustee's responsibility is not only to make certain premiums are paid to ensure policies do not lapse and beneficiaries receive the promised death benefits, but it is also to ensure the proper management of those policies.
But what does "proper management" mean for a Trustee in the event that the grantor can no longer afford to or no longer wishes to make premium payments to keep the policy in force? What can the Trustee do to ensure that the beneficiaries' interests are protected?
For the Trustee who is aware that the policy is potentially of resale value far in excess of surrender value - typically referred to as a "life settlement" - and how to pursue a proper valuation and sale, there is an opportunity to create substantive value for the beneficiaries. The same is true of the grantor's wealth Advisors, inasmuch as the proceeds from a sale can be added to AUM and used to fund alternative, higher return, fee generating strategies, to the benefit of those beneficiaries...and, obviously, to grow fee revenue.
However, for the Trustee who is unaware of the option to sell the policy, the likelihood is that the policy is lapsed or surrendered for little or no benefit to the Trust, and therein lies the risk, that Trustee is in jeopardy of being held liable for damage from not having explored options to maximize the value of the trust and failing to fulfill his/her "Standard of Care" fiduciary responsibility.
Being Prepared for the Opportunity Creates Value
We recently worked with the Trustee of a $3 million ILIT and the grantor/insured's wealth advisor. The grantor/insured no longer wished to pay, after 15 years, the $75,000/year premiums to keep the policy in force. The Advisor, though, was aware of - prepared for the opportunity, as it were - of the potential to sell the policy, so, discussed it with the Trustee, who wanted to ensure the best possible outcome for the beneficiaries. The policy was sold for $170,000, 3.4x surrender value and the proceeds were redeployed into an alternative strategy that the grantor’s Wealth Advisor will manage. Over the projected life expectancy of the grantor/insured, the beneficiaries, at an 8% return, will receive $520,000 more than what surrendering the policy and redeploying those proceeds would generate (Redeploy $170,000 sale vs $50,000 surrender @ t = 0). Clearly, a win for the beneficiaries and the Advisor...and the Trustee was able to fulfill his fiduciary responsibility to "manage" the policy and maximize the value of the Trust for the beneficiaries, even with the underlying not being maintained.
Not Being Aware Means Not Being Prepared...
And not being prepared typically results in a missed opportunity...and, potentially, a breach of fiduciary obligation to maximize the value of the Trust. We recently met with an excellent wealth Advisor - not a Trustee - for whom the introduction piqued a recollection of a client who "might be" lapsing a large policy held in a Trust. Unfortunately, much to his and his client's disappointment and financial detriment, the policy had, indeed, been lapsed - for no compensation at all to the owner. The Advisor had been unaware. The Trustee had been unaware - and the grantor remained unaware. An opportunity had been squandered; the $2,000,000 policy would likely have fetched $300,000.
So, whether you are a Trustee of a life insurance Trust or a wealth Advisor to a grantor of such a Trust, wouldn't you prefer to "...put yourself in such shape that when or if the opportunities come, you are ready" than to run the risk of "opportunity wasting no time with the unprepared"?
If yes, we'd love to help ensure that you are "ready".
It starts out like the below screen grabs, simply enough, but, it is invariably the beginning of a path to mislead and confuse. Ultimately ensuring that the individual who is considering the sale of an unwanted or surplus life insurance policy will receive less than fair market value for his or her asset...and that an unscrupulous intermediary (we think of most of them as parasites, but, we'll keep that to ourselves) extracts wildly irrational economics from the transaction .
below is not the beginning of a productive, honest relationship...
While it is possible to provide a directionally useful estimate of value of your policy very quickly, it is, literally, impossible to calculate an even remotely useful estimation of value without knowing at least the following:
- Face Value (death benefit) of policy
- Age, health, and gender of the insured(s)
- Projected premium stream into future years (in force illustration)
- Maturity age of the policy
- The product itself and the carrier
- Whether it is a single or joint policy and which insured(s) are alive
- The issue date of the policy
- State of policy domicile
As importantly, the valuation factor that no "instant estimate" can provide - including any estimate that 1908advisors might generate for a prospective seller - is what individual market participants might value at this moment, which is manifested in the discount rate that they apply to the projected cash flows of a given policy. But, that is perhaps fodder for another blog post. So, back to the topic at hand.
Most "life settlement" brokers (and now, "marketing referral" companies) rely on one simple fact, that few people understand - or want to understand - the process of how to sell an unwanted life insurance policy. While the level of understanding among life insurance owners and fiduciaries as to how to sell an unwanted life insurance policy remains relatively low, the evoliuton of search engine optimization has intensified the competition among intermediaries to secure the active interest of the prospective policy sellers before they learn too much and before they understand with whom they should and should not be placing their trust. Why? For a broker, to limit your options, thus ensuring that they can charge you an otherwise indefensible transaction fee. Or, for a marketing referral company, typically, to buy the policy from you at a far below market price, and then turn around and sell it for a massive profit...dollars that should be going into your pocket.
So...do not bother with the "instant, free estimate", as it is of, literally, no value, and never, ever, EVER, accept an offer from a marketing referral company without exploring your options. And never, ever, EVER sign a non-circumvent agreement with a broker. Ever.
If you've done either or are contemplating either, please...think again. And give us a call. We'd love to help.
Myth - Brokers have, manage, or control the capital to buy your policy.
Truth - There is not a single life settlement broker in the market that has its own capital or that has any control or influence over what policies principal investors will purchase or how much those investors (institutional buyers such as Apollo, Blackstone, TPG, Redbird Capital Partners, Berkshire Hathaway, Vida Capital, etc.) will pay. Not a single one. Brokers, by definition, broker your policy to actual buyers, through their statutory buyer agents, "Providers" (some of which are directly connected to capital, inasmuch as they are captive to a single buyer) and collect a fee for having introduced your policies to those buyers. Now, while there is nothing wrong with providing such a service, the implication that they have capital is not an accident. They imply that they have the capital to purchase your policy or that they are "asset managers" - using the word "capital" or "capital management" in their name, suggesting with loose or explicitly misleading wording of what service they provide - to exaggerate their significance in the transaction and in order to create the perception that they have control when, in fact, they do not...and to justify their fees.
As you'll see in subsequent posts, though, this isn't the only misleading tactic employed by life settlement brokers and the life insurance agents - who sold the policy in the first place - with whom they work (and pay to bring them policies)...all enabling them to extract egregious, unconscionable fees from policy sellers, taking 15% - 40% of the proceeds from the sale of YOUR client's asset, resulting in a significantly smaller windfall to your client than they should receive.
Brief, simple posts to provide wealth advisors and HNW policy owners additional insight as to how to most efficiently and cost effectively - and how to avoid common pitfalls and less-than-professional intermediaries - undertake the sale of an unwanted or surplus life insurance policy.