You should know if your clients should sell their insurance policies

Susan J. Bruno, CPA/PFS, of Beacon Wealth Consulting in Rowaton, Conn., maintains that sometimes CPAs are afraid of what they don't know, so they avoid it. That instinct, she warned, can often be hazardous to a client's financial health.

Bruno is on a crusade to educate CPAs about life settlements, the proper sale of a life insurance policy to an investor when the client is better served by forsaking steering a death benefit to heirs to gain an immediate infusion of cash.

Life settlements are sometimes confused with abusive or potentially fraudulent "STOLI" (stranger-originated life insurance) transactions. In those deals, large life policies are sold to elderly people who had no genuine need for the coverage, with the promise that the contracts will be immediately bought back by an investor and create a windfall for the insured.

Life settlements are also sometimes confused with viatical settlements, the sale of a life policy when the policyholder is in dire financial straits and has a very short life expectancy, typically due to a terminal illness.

"I think it's a borderline fiduciary responsibility for CPAs to know whether a life settlement is an option for a client," said Bruno. After describing a recent case in which an elderly client sold a long-held insurance policy, instead of simply letting it lapse, she asked: "Imagine if this guy had let the policy lapse and later learned that he could have sold it. He goes to his accountant and says, 'Are you kidding me? You didn't tell me I just gave up a valuable asset in my portfolio?'"

No CPA would want to be put in that position, she said.

So what kind of clients might benefit from pursuing a life settlement?

Bruno recently handled a case involving a client in his early 80s who had been dutifully paying premiums on a $500,000 face amount universal life policy with a limited cash value. When the policy was originally purchased by the client many years ago, illustrations (based on higher prevailing interest rates at the time) projected a substantial cash value by today.

That cash value could have been used to cover premiums, or paid to the client upon surrendering the policy. But because the underlying interest rate was variable and had declined - consistent with bond market yields - that scenario had not come to pass, and the client was still paying $35,000 in annual premiums. He asked whether he was better off simply letting the policy lapse.

His CPA knew he might have a third alternative - a life settlement - and referred the case to Bruno. Ultimately, the client received an offer of $180,000 for the policy - an offer he decided to accept.

GOLD MINE?

Another situation that might give rise to a life settlement, Bruno said, involves "key man" life insurance in a business context. "A lot of times the policy will be dropped when the key man retires, but the owner [of the policy] may be sitting on a gold mine," she explained.

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