Kid with Change
Michael Bradburn July 20, 2018

Found Money

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Not to wish the summer away, but one of those little joys that occasionally happens in the Fall is when you transition out of your shorts and find the $20 in your blue jeans pocket that you forgot about last Spring. I love it when that happens.

Well, there's money to be found in the pockets of your client book if you know which pocket to look in. It's sitting in your clients' life insurance coverage.

"Life insurance is fun, interesting and I just can't get enough of it," said no one, ever! I get it. Most RIAs depend on a life insurance agent or they got a guy in the office that handles that stuff. Here's a really good reason to dig around in the oft-overlooked life insurance pocket in your client accounts: the forgotten bills have a lot more zeros on them than the aforementioned $20.

People buy life insurance for the ordinary reasons. Then life happens. Things change and people don't. It's a lot like the gym membership you buy right after Christmas with the best of intent to resolve in the New Year. You're still paying the bill but haven't been there since late January.

Life insurance can result in the same way. You just keep paying for it but you're not going to use it.

Over the course of time, people and their needs, wants, and desires change. As a holistic planner and responsible steward of your clients' wealth creation and preservation plans, periodically reviewing life insurance coverage is the right thing to do. It may help you get motivated to take interest in this orphaned asset class because it's full of FOUND MONEY!

Let me give you an example of an investor that may be sitting in your cadre of clients right now:

Joe (I don't know why fictional characters are always named Joe, but so be it) is a very successful tech startup company veteran who recently rang the bell when a Silicon Valley monolith bought his partners' and his little venture. You've been along for the ride all these years and are managing Joe's windfall and planning for his gentle ride into the sunset.

Remember when Joe and his partners started hitting their stride and they decided a cross-purchase key man life insurance plan was a smart way to protect themselves in case one of the partners suffered an untimely demise? Well now that the company has been bought out, Joe and his former partners have decisions to make.

Does it make sense, relative to their respective estate and retirement plans, to keep paying the premiums on those Key Man Policies and use them in their capital and risk management strategies? Should they stop paying the premiums and lapse the policies? Should they surrender them to the life insurance carriers and take what they can get?

Here's where the FOUND MONEY IS! Each of the partners decided that a $3,000,000 Universal Life Insurance policy was the right number to insure each of their lives. Here's the rundown on Joe's policy:

  • $3,000,000 Face Amount
  • $ 94,850 Annual Premiums
  • $ 45,000 Surrender Value
  • $ 0 Lapse Value

Joe is now 75 years old. Relative to his own planning needs, this policy really serves no purpose. He's flush with cash and owns other life insurance policies to handle his estate tax problems (although the estate tax lifetime exclusion doubled with the recently enacted tax legislation, which is another opportunity to review) and the kids are doing fine.

Joe caught wind of the Senior Life Settlement phenomena sweeping the nation (perhaps slightly over-enthusiastically stated) and decided to investigate. A Senior Life Settlement is the sale of an existing life insurance policy to a third-party for a lump sum.

The settlement transaction is affected by a licensed Provider in a competitive bid process and maximizes the monetary value of the policy at a price greater than the originating carrier's surrender offer but less than the face amount. Joe likes cash.

Joe and his insurance agent went through a simple process to test the waters to see what his policy would bring in the secondary life insurance market. After all the bids were in, Joe was able to sell his policy to a Provider for over $792,000.

Oh, ya did? Have you ever heard yourself utter that phrase? You see, you and Joe are pretty tight. You manage the lion's share of his fortune for his bride and himself, as well as his family. You go to lunch and play golf together and stay up on the life and time's of Joe's family.

As a matter of fact, Joe shared his compelling story with you on the links last weekend. He went on to say that he planned on looking at a real estate opportunity in Hilton Head and you, trusted advisor, would be welcome to come down anytime and bring your sticks. And you say..."Oh, ya did?"

Wouldn't this story end better, at least for you Mr./Ms. RIA, if this had been your idea? And I'm sure it's not lost on you that there are three of these deals floating out there. Potentially over $2,000,000 of net new AUM you could have had if you understood the Life Settlement Story. Instead, you got a lunch tab, lost the round and the ever self-esteem boosting, "Oh, ya did?"

Reach into your pockets: there's gold in there.

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