Insurance policies with rising or re-appearing premiums can often cause their owners problems, especially when those owners' financial needs or obligations change.Is it a better investment to continue paying a policy that you have already paid into in hopes of a gain at maturation, or to recoup some of the investment by trading the policy for its cash surrender value? Corporate policyholders often face additional dilemmas when dealing with departing executives with key-man or split-dollar policies, or insurance purchased as part of a buy-sell agreement.

Another option is to sell the policy for cash. With a life settlement, the policyholder realizes an amount much greater than the cash surrender value in exchange for the ownership of the policy, thus increasing immediate revenue for companies holding unprofitable policies.

You can also sell term insurance policies. Life-settlement transactions involving key-man or buy-sell policies can provide businesses with increased cash flow to solve immediate financial problems, while transactions concerning split-dollar policies typically involve retirement planning and charitable giving issues.

An individual can also sell their policy for cash. In a recent advisor survey, nearly half of the respondents had clients who had surrendered a life insurance policy, many of whom might have qualified for a life-settlement transaction and subsequent lump-sum cash payment.

A primary reason why an accountant should be well-versed in the life-settlements field is the importance of their fiduciary responsibility to clients. When providing financial advice and strategic information, being able to identify a way to eliminate an asset that burdens the client with unnecessary expenses can be very helpful. Offering more options can satisfy more clients.

The life-settlement process takes about a month, is confidential, and the proceeds can be used for anything.

A recent settlement example is a 66-year-old male with a $2 million universal life policy with $4,200 of cash surrender value. The owner, who could no longer afford the increasing premiums, was paid $194,992 for the policy.

If one still needs life insurance, but does not want to continue the existing policy, the insurance swap-out should be compared to the life-settlement offer for the best results. That involves the exchange of insurance, elimination of taxable "paper" gain, or credit against a new policy of basis in an old one.

The alternatives to the above are keeping unwanted insurance, canceling and paying taxes, or canceling insurance and losing credit for the taxable loss.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans and tax reduction strategies. For more information, visit

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access