Life insurance after a divorce or estate change
When the arrangement behind a policy ends, there is often real value still sitting in it.
Life insurance policies are bought for specific purposes: to protect a spouse, fund a trust, cover an estate tax, or fulfill a divorce decree. When those arrangements change — through divorce, death of a beneficiary, a revised estate plan, or a change in tax law — the policy may no longer serve its original purpose. Before surrendering it or letting it lapse, it is worth finding out what the secondary market would pay.
Divorce
Divorce decrees sometimes require one spouse to maintain a life insurance policy for the benefit of the other or for minor children. When children reach adulthood or a support obligation ends, that requirement may expire. In other cases, a policy was owned jointly or was part of a settlement that has since been modified. If the obligation that required the policy is gone, the policy may be available for a life settlement.
Irrevocable life insurance trusts (ILITs)
ILITs were commonly used to hold life insurance outside of a taxable estate. Changes in the estate tax exemption — which has risen substantially over the past two decades — have made many ILITs unnecessary. If the trust was created to cover an estate tax that no longer applies, the trustee may have the authority to sell the policy. This requires careful review of the trust document and applicable state law, and typically involves the trustee, the grantor, and legal counsel.
Key-person and buy-sell policies
Businesses often purchase life insurance on key employees or owners to fund a buy-sell agreement or protect against the loss of a critical person. When the business is sold, the key person leaves, or the buy-sell agreement is restructured, those policies may no longer be needed. A business-owned policy can sometimes be sold in the secondary market, though the tax treatment differs from personally-owned policies and requires careful analysis.
Estate planning changes
Estate plans change. Beneficiaries predecease the insured. Assets are redistributed. Charitable intentions shift. A policy that was central to an estate plan five years ago may be peripheral today. If the policy is no longer serving a clear estate planning purpose, it is worth evaluating whether the secondary market would pay more than the surrender value.
The situation may be more straightforward than it looks.
Tell us about the policy and the arrangement behind it. We can usually tell you quickly whether a life settlement is a realistic option.
Find out whether the policy has value.
One conversation is usually enough to tell you whether the situation qualifies and what the process would look like.