For advisors, the question of whether a life insurance policy should be sold considers the welfare and will of a senior client they work with. But what many might not realize — until they’ve found themselves in that situation — is that such a decision should also involve their adult children, who are intimately involved in the care of their parents.
“Adult children are not only providing physical and emotional support, they are also providing financial support,” observed Anne Long, senior vice president of Business Development at Lighthouse Life, in a piece published by ThinkAdvisor.
When engaging with the adult child of a senior client considering a life settlement, Long said, there are three important areas to address. First, there should be a discussion around whether the client’s life insurance policy should be kept.
“Children often know very little about their parent’s finances,” she said. Because of this ignorance, many insurance policies wind up terminated before the insured person’s death under the terms of the policy. Citing the American Council of Life Insurers, she said just 7.5% of all terminated policies in 2018 paid a death benefit to beneficiaries.
“This is why it’s crucial to advise adult children to ask their parents about what, if any, life insurance policies they may have and help them determine if the policy is still affordable,” Long said, noting that advisors can help clients and their children zero in on important details such as what the current and future premiums are, when the next premium is due, whether the policy has a cash surrender value, and whether it’s a term policy that can be converted into a permanent policy.
Another important conversation involves determining the best use of the policy for the senior client. Some adult children helping their parents with finances may be inclined to think about receiving that death benefit, as opposed to using the policy to support their parents’ living needs. Situations involving multiple children as beneficiaries, or an adult child supporting their parents as they face their own financial challenges, can be even more loaded.
“Despite obvious tensions that can arise … the advisor should remember that they represent their senior client and, in some cases, owe a fiduciary duty and responsibility to act in their client’s best interests,” Long said. Given that, she said advisors can explain that since the policy is the parent’s asset, it should be used for the parent’s sake; the proceeds from a life settlement can be used to ease the burden for the children giving financial support and, in some cases, be used to compensate children who are providing physical care.
Finally, the importance of getting a life policy appraised for a life settlement should be emphasized, as knowing its current market value will be crucial in deciding to keep or sell it. Depending on the appraisal, the senior client and their children may find that the policy is a smart investment — in some cases, as valuable as equity in a home — or one of the most expensive, underperforming assets in the client’s portfolio.
“An advisor can provide a great service by simply suggesting to the client and adult children that the policy be appraised,” Long said, explaining that the process would involve getting some health information about the insured person and information about the policy itself. “The children can help by encouraging their parent to get an appraisal and helping collect this information.”