This week we interview Lucas Siegel about investing in structured settlements. We discuss the good the bad and ugly history of life settlements. This is a fascinating asset class which very people understand. Here's what you need to know about investing in life settlements. Join us this week with Lucas Siegel.
Investment Advisors: The Differentiator That Can Drive AUM and Happier Clients
You play many roles as an investment advisor. You are part realist, part visionary. You're also a disciplined planner, securities expert, and savvy forecaster. No matter which of those roles you're best at, though, the topline goal is the same: You're there to help your clients achieve greater wealth and financial security.
Many advisors pursue that goal without much regard for the client's life insurance. It's a limiting strategy. Life insurance is more than a future payment for the client's beneficiaries. The coverage is also a salable asset and a source or use of liquidity during the client's lifetime.
Below, I'll make the case for adopting annual life insurance reviews into your client process. In those reviews, you'll analyze which is better for the client long-term -- maintaining the insurance policy or having your client sell their policy and funneling that policy's value and future premiums into the client's portfolio.
Why life insurance gets overlooked
There are reasons why you may have avoided addressing life insurance with your clients. You might not know how to value life insurance or – more importantly – that your clients can sell their life insurance and put the proceeds back into their portfolio. It’s a common assumption that the liquidation value of life insurance is limited to the policy’s cash surrender value.
As you'll learn shortly, many life insurance policies can be liquidated for far more than their surrender values.
Changing the perspective on life insurance
Keeping that in mind, let's look at how life insurance affects your client's net worth.
Permanent life insurance is an asset. More than that, a mature life insurance policy is a liquid asset. It can be sold to a third-party in a life settlement or surrendered for a cash payout. The insurance provider can complete a surrender within weeks, while a life settlement can be done within months.
The value of life insurance grows over time, eventually reaching the death benefit amount. That growth is not without cost, however. Your client likely must fund premiums on the policy to keep it in force.
So, life insurance is a store of value and a use of liquidity -- not unlike your client's equity holdings and other investments.
You regularly review those equity holdings and other investments to ensure you're making the best use of your client's wealth. If one position proves to be disappointing, you liquidate and redeploy those funds for higher returns elsewhere.
Why not apply that opportunity cost logic to life insurance? You and your clients will appreciate knowing whether the value locked in life insurance can generate higher gains elsewhere, such as in an investment portfolio.
The value of life insurance
The first step in completing an accurate opportunity cost analysis on life insurance is understanding the policy's liquidation value. Here's a key point many analysts and policyholders do not know: For clients aged 65 or older, the cash surrender value may only be a fraction of the policy's value on the life settlement market.
Depending on the insured's age and health, a policy's life settlement value is typically four to 12 times higher than its surrender value.
The most accurate way to value a policy, then, is to obtain an estimate from a reputable life settlement broker. Harbor Life Settlements provides this service for free and without obligation.
Benefits of taking a holistic view on net worth
Including estimated life settlement values in your net worth analyses has advantages, for you and your client. For one, you'll have a more accurate estimate of your client's liquidity. That's important when you're analyzing risk.
An untapped source of liquidity is also useful when the client would benefit from investment strategy changes. Consider the client who has unexpectedly retired ahead of schedule. He or she may want more exposure to fixed-income securities or more substantial inflation protection.
Selling a life insurance policy may be the least disruptive way to generate cash to support those portfolio adjustments. It's almost certainly more advantageous than liquidating income-producing assets.
Your view of life insurance as part of your client's larger, wealth-building portfolio can also be a differentiator for you as an advisor. Your clients will appreciate the extra guidance. That appreciation can translate into referrals and more assets to manage, by client and overall.
Questions to ask about clients' life insurance
A higher-than-expected liquidation value on life insurance is great news, but it may not be a sole justification for selling. Your analysis should go deeper. Talk to your client about the policy's intended purpose and the cost of keeping that policy in force going forward.
What is the policy's intended purpose, and does it still fulfill that goal?
You can provide better guidance when you know why the client bought the policy initially. Say the client adamantly wants to leave $1 million tax-free to loved ones. Life insurance can fulfill that purpose reliably.
But what if the client bought the policy 25 years ago and has since amassed a sizable balance in a Roth IRA? The assets in the Roth IRA can also be inherited without tax consequences. Plus, the beneficiaries can leave the funds invested tax-free for 10 more years.
In this case, you'd want to assess if the clients and their beneficiaries would ultimately benefit more from keeping the insurance in force or from liquidating it and using the funds in another way.
What is the premium burden?
Some life insurance policies are paid up and require no further premiums. Others demand significant and rising premium payments to remain in force. To analyze your client's policy accurately, you'll need to know where it falls on that spectrum.
A large premium burden can indicate the policy is ultimately worth more liquidated than in force. In a life settlement, the premium burden for the client goes away. The premium payment responsibility transfers to the policy's new owner.
Life insurance opportunity cost analysis
When you know the policy's estimated life settlement value and future premiums, plus the client's goals, you have most of the information required for an opportunity cost analysis. In that analysis, you’ll compare the cost and potential of keeping the policy vs. selling it and reinvesting the proceeds.
The remaining information you need to complete that comparison is the expected rate of return on new client funds and your client's life expectancy.
With that data, you could project the investment growth of the net life settlement proceeds plus all future premium payments during your client's lifetime. You'd compare the ending balance of that projection to the death benefit on the life insurance.
The wildcard here is your client's life expectancy. Harbor Life Settlements regularly provides free opportunity cost analyses for financial advisors, and handles the longevity factor this way:
- Early in the process, Harbor Life can run an opportunity cost analysis using an estimated lifespan for the client, based on demographics.
- If the client and advisor want to move forward, Harbor Life secures a life expectancy assessment from a medical underwriter. That facilitates a second analysis.
- If Harbor Life markets and secures bids on the policy, they'll do a final analysis using the underwritten life expectancy estimate and the actual net proceeds the highest life settlement bid will generate. If that final analysis doesn't support the liquidation strategy, the client can decline the offer.
Through this process, Harbor Life ensures you and your client have all the facts available before deciding to sell the policy. If the analysis projects the policy is worth more in force, the client can do nothing and keep the death benefit intact. Otherwise, the client can accept the offer, liquidate the policy, and (under your guidance) invest the proceeds to build more wealth.
Life insurance, a differentiator for advisors
Don't let the value trapped in life insurance limit your clients' financial outlook. Contact Harbor Life Settlements today to learn how we can support the expansion of your services and expertise to include life insurance analysis.
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Today's Guest: Lucas Siegel
Lucas Siegel is the CEO of Harbor Life Settlements & Harbor Life Brokerage. Since its launch in early 2020, Harbor Life Online Exchange has listed hundreds of millions in life insurance policies for sale and has been pivotal in transforming the industry standard.
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