THINGS YOUR CLIENTS SHOULD KNOW BEFORE SELLING A LIFE INSURANCE POLICY

The following information was released by the National Association of Insurance and Financial Advisors (NAIFA):

By Ike Trotter on 7/10/26 1:00 PM

More and more, your clients may see ads on television and online promoting the pitch: "If you have a life insurance policy you no longer need..." meaning there are ways today to sell or turn in a policy and receive money. A particular company boldly advertises these transactions as "Sitting on a Gold Mine." These transactions or products are called viatical life settlements or senior settlement polices and have become increasingly popular in the last several years. In layman's terms, they provide a means of selling an existing life insurance policy to a third party (represented by a person, entity, or financial institution) other than the company that issued the original policy. The policy holder (seller) can then receive an immediate financial payment from the third-party offering the settlement.In today's world there are certainly good reasons for some viatical life settlements. But it's important that your clients understand their options and (hopefully) have a discussion with their agent before taking action. What might be reasons people hold on to their life insurance policies today? In short, I have a listed a few reasons to consider:

To help cover living expenses for a loved one or surviving family members who depend on the primary breadwinner financially.

As opposed to other assets payable at death to a spouse or loved one, life insurance paid to a named beneficiary is normally paid income tax free.

To help loved ones and beneficiaries avoid unexpected costs due to unforeseen expenses and delays of probate.

To assistant with larger than anticipated financial obligations at death such as car debts, loans, and other financial debts that may come about after the death of the primary breadwinner.

To keep surviving loved ones from being forced to sell off other assets to make financial ends meet. This can happen more often than you might think.

To provide a means of legacy planning for one's favorite charity, school, or religious institution.

To make up for reduced social security benefits to a surviving spouse due to the death of the primary breadwinner.

To provide replacement dollars at the death of the primary breadwinner in the event of nursing expenses due to long-term care confinement.

To provide an additional safety net of cash available for end-of-life medical expenses that can very well be greater than anticipated.

Interestingly enough, insurance companies tell us viatical life settlements could potentially affect the life insurance industry and the manner to which policies are priced. The reason for this is because policyholders often let their life insurance lapse before they die for a variety of reasons: children grow up, a diminished need for protection at older ages, or the premiums become too expensive. When that situation occurs, the insurer does not have to make a payout. And along with mortality expenses, this is priced into the premium payment.

However, with a policy purchased through a life settlement, uninterested investors or entities will keep paying the premiums on policies that might have otherwise have lapsed. As a result, there is a greater chance that policies stay in force, which lines the pocket of the life settlement group but leaves less money for the life insurance company. What could very well happen is that life insurance companies might have to raise premiums on new policies in the future. And who wants that?

But what really concerns me more than anything is knowing that if I sell my policy to a viatical life settlement group, some entity I don't know will eventually make money by the event of my passing. And that just gives me the creeps.

Information provided for this article is general in nature and not intended as specific financial advice

Ike S. Trotter, CLU, ChFC is a well-recognized career professional in the financial services industry and operates his own risk management firm in Greenville, Mississippi. Opinions expressed are his own and not necessarily those of Advisor Today or NAIFA.