LIFE SETTLEMENTS – THE HIDDEN TOOL TO UNLOCK, PRESERVE AND RESCUE VALUE IN THE ESTATE PLAN

By Tama Brooks Klosek* and Michelle Graham**

MCLE Article

I. SYNOPSIS

In developing an estate plan for clients, life insurance can often play a key role. However, many clients do not understand the complexity of the product being purchased or realize the risks in the contract and potential for the life insurance to lapse prior to life expectancy. In addition, it is possible for a life insurance contract as it matures to reach a “crossover point” when continued investment in the contract may not yield an optimal financial result.¹ This Tip for the Trade seeks to help estate planning and probate attorneys, including fiduciary litigators, to understand the life settlement strategy for exiting a life insurance contract if the insurance cannot, should not or will not be maintained, and the potential liability for fiduciaries of life insurance trusts who fail to become informed regarding the life settlement market and share such information with trust grantors and beneficiaries. An estimated 500,000 insurance policies which may qualify for a life settlement lapse or are surrendered annually; however, in 2020 only 3,241 policies were sold in a life settlement transaction.² This shocking differential is only explained because of one problem—the pure lack of knowledge among insureds and their advisors, including estate planning and probate attorneys, regarding the life settlement market.