Vol 4 No 3		August 2002

Katt & Company is a fee-only life insurance advising firm. We work with clients throughout the U.S. - primarily by phone, mail, email and telecopy. Typically, we assist clients buying life insurance, those who need existing policies reviewed and managed, and in support of litigation. For references please contact us.

Alert and Information

The selling of in-force life insurance policies has become a hot topic among insurance salespersons. Heavy solicitation to convince us this is a great deal is targeting attorneys, CPAs, financial advisors and consumers directly. In addition, articles in trade publications, many under the guise of objective professional information, are promoting the sale of existing life insurance policies. Some suggest that advisors have a responsibility to get life settlement quotes for clients with unneeded policies. Katt & Company has analyzed half-a-dozen life settlement transactions.

Our examination of these life settlement transactions makes four things clear. One, agents involved in these transactions misrepresent the advantages and do not disclose very important information. Two, an informed decision to sell or retain a policy can only be made after a careful and impartial analysis because there will be as many good reasons to sell the policy as to retain it. Clients in identical circumstances will make different decisions based on individual judgements. That is, a careful analysis will demonstrate that selling or retain a policy produces no clear winner and loser. Three, you should shop the possible sale of a policy with several life settlement firms because competition will increase the purchase offer. (Caution, don' do business with firms that sell policies to investors who receive identifying policy information. The safest place to sell policies is to life settlement firms that have institutional investors and are buying policies for their own investment). And four, if you have initiated the idea to sell a policy your failure to expertly present the potential advantages and disadvantages of selling a policy may increase your malpractice exposure.

For a more thorough discussion, with instructions on how to calculate the potential value of life settlement transactions, see my May 2002 AAII Journal column, Does it Make Sense to Sell Your Life Insurance Policy?, and the attached (redacted) client report on a life settlement option.

Tip

Generation skipping planning (at least under the current estate and gift tax regime) via so-called dynasty trusts often use life insurance as a funding vehicle. And since life insurance is being used because of the significant income-tax advantage (proceeds are free of any income and capital gain taxes) the longer the life insurance is in force the better. Therefore, we often suggest insuring younger generations, including children. Most life insurance companies will only sell children life insurance based on smoker rates because they don't know if the children will be smokers as adults and they can't later impose smoker rates if the insureds take up the habit as young adults. Be sure you know when smoker rates are being used when children are insured via dynasty trusts and schedule to have the smoker mortality rates removed if the insureds are not smokers at the earliest time the insurance company will allow, usually age 21. Failing to do this will cause the life insurance policy's performance to be much poorer than it should be.