Why advisors should be talking about life settlements

The life settlement market is often described as niche, but recent five-year data from the Life Insurance Settlement Association tells an interesting story.

Since 2021, more than $20 billion in life insurance policy value has changed hands through the secondary market, with LISA members paying consumers $3.6 billion for policies they no longer needed. This is $3 billion more than those same policyholders would have received by surrendering to insurers.

These figures shed light on a mature, regulated industry with minimal awareness among both consumers and advisors.

An estimated $50 billion in policies are still lapsed or surrendered each year. As retirement pressures rise, life settlements offer a way to unlock much-needed liquidity from existing assets.

However, many eligible policies are still surrendered or allowed to lapse simply because this option isn’t considered. Advisors need to recognize the benefits of life settlements and present them to clients who could benefit from them the most.

Why is awareness low

Surrendering a policy has long been treated as the default outcome when coverage is no longer needed.

“Many consumers, and even financial advisors, still do not realize a regulated secondary market exists for insurance policies,” said Bryan Nicholson, executive director of the LISA.

Despite the scale of the market itself, the awareness gap persists. Compared to traditional life insurance policies and other financial products, there simply isn’t enough education and promotion around life settlements.

The ideal clients for life settlements

Life settlements aren’t for everyone. However, they’re often a good option for those whose financial or life circumstances have changed since they originally purchased their policy.

“Maybe they no longer have the need they originally had. Or perhaps their coverage is too expensive for their current situation,” Nicholson explained.

For example, a 65-year-old client may hold a universal life policy with premiums that have continually increased over time. If this product no longer aligns with their budget or lifestyle, life settlements might be worthwhile.

“Life settlements can also benefit retirees with financially independent children, those who have paid off their mortgage, or families who need to make changes to their estate plan,” Nicholson added.

The common thread is that many policyholders are sitting on a meaningful financial asset without fully understanding its market value. Life settlements are often a better option than surrendering a policy or losing it because, in those cases, clients let premiums lapse.

Life settlements in financial planning

These days, the retirement gap is widening, and more Americans are looking closely at assets they already own rather than taking on additional market risk or new financial products. That’s where the value of life settlements truly shines.

“For many policyholders, an unwanted or underperforming life insurance policy may represent a meaningful source of untapped liquidity, making a life settlement worth exploring,” Nicholson said.

As an advisor, it’s essential to recognize this and support clients who can leverage such a commonly overlooked yet effective tool.

To reach a client who could reap the benefits of life settlements, first explain what they are and welcome questions about how these products work, Nicholson explained. As with any product, education is key.

“Clarify that a life settlement can help them recover substantially more value from an asset they already have,” Nicholson said.

Also, debunk the common misconception that life settlements take advantage of policyholders. That’s not the case. The industry is highly regulated, supporters say, but some clients may believe otherwise and worry about finding a legitimate institution.

Once they express interest in life settlements and you’ve alleviated any hesitations they might have, you can take the next step and help incorporate them into the client’s holistic financial plan.

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