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Every year, hundreds of thousands of life insurance policies lapse or are surrendered for cash. The policyholders walk away with whatever the carrier offers. Their advisors sign off. Their attorneys see nothing. And nobody asks the obvious question.
Could this policy have sold for more?
The answer, in a significant percentage of cases involving clients over 65, is yes. Often dramatically more. And the failure to explore that question is one of the most underexamined fiduciary gaps in financial planning practice today.
What the Secondary Market Actually Is
A life settlement is the sale of an existing life insurance policy to a third party for more than the cash surrender value. The buyer takes over premium payments and collects the death benefit when the insured dies. The seller receives a lump sum today.
The market has been active since the 1980s, is regulated in 43 states, and has grown to roughly $4 billion to $5 billion in annual transaction volume. It is not exotic. It is not controversial. It is a legitimate asset transaction that most advisors simply never raise with their clients.
The buyers are institutional: pension funds, hedge funds, family offices. They run detailed actuarial models. When they make an offer, it reflects real market analysis of the policy’s fair market value.
The Math Your Client’s Carrier Is Not Sharing
When a client over 65 with a $500,000 universal life policy considers surrendering it, the carrier’s offer reflects one thing: the cash value the client has accumulated, minus any surrender charges.
The life settlement market operates on a different calculation entirely: the present value of the death benefit, discounted against projected life expectancy. In many cases, a policy with a $40,000 cash surrender value can attract settlement offers of $100,000, $150,000, or more.
It should be noted that while the return of the total premiums to the original policyholder is not taxable, any gains up to the policy’s cash surrender value are taxed as ordinary income. And any gains beyond the cash surrender value are taxed as long-term capital gains.
I have brokered transactions where the settlement amount was eight to ten times the cash surrender value. I also have brokered transactions where the margin was smaller. But I have never brokered a case where the client walked away wishing they had taken the carrier’s offer instead.
The spread exists because the carrier’s cash value and the policy’s market value are fundamentally different numbers. Advisors who know only one of them are working with incomplete information.
Where Fiduciary Duty Intersects With Life Settlements
The word “fiduciary” gets applied broadly in the advisory space, but the core obligation is clear: An advisor with fiduciary duty is required to act in the client’s best financial interest, not merely to avoid recommending unsuitable products.
Under SEC Regulation Best Interest, the DOL fiduciary rule framework, and most state-level standards, advisors working with retirement assets are held to some version of this standard. The key question for life insurance is whether a policy connected to a client’s retirement plan, estate plan, or overall financial picture falls within that standard’s scope.
In many cases, it does. And when it does, the obligation to at least explore available options before recommending surrender or lapse is difficult to argue around.
The “I didn’t know this was an option” defense is weakening. The life settlement market is regulated, publicized, and accessible. The Life Insurance Settlement Association publishes consumer guidance. Institutional buyers advertise to brokers. The infrastructure is there.
More importantly, the question is not whether the advisor was personally aware of the secondary market. The question is whether a reasonable fiduciary, acting in the client’s best interest, would have been.
Who Qualifies: A Practical Screen
Not every policy and not every client is a candidate. Here is the screen I use in practice:
Insured age: 65 or older. The strongest settlement values typically emerge between ages 70 and 85. Younger insureds with standard health histories rarely attract competitive offers.
Policy face value: $100,000 minimum. Transaction economics generally do not support smaller policies. The most favorable settlement values emerge in the $500,000 to $5 million range.
Health status: Impaired but not terminal. A client who is moderately ill often commands a better settlement offer than one in perfect health. Buyers are purchasing exposure to mortality risk. Morbid though it may be, a shortened life expectancy improves the present value of the death benefit from the buyer’s perspective.
Policy type: Universal life, whole life, and convertible term all qualify. Straight term policies without a conversion feature rarely do.
Premium sustainability: If the client can no longer afford premiums and is facing a lapse anyway, the settlement conversation is urgent. A policy that lapses before the transaction closes has zero settlement value.
In practical terms: If you have clients over 70 with permanent life insurance, and their net worth suggests they may no longer need the death benefit for estate planning purposes, the conversation is worth having.
A Practical Framework for Advisors
I am not suggesting advisors become life settlement brokers. I am suggesting a four-step protocol that takes roughly 30 minutes per client per year.
Step one: Add a question to your annual review. When reviewing insurance coverage with clients over 65, ask: “Is this policy still serving its original purpose? If you no longer need the death benefit, do you know what it might be worth on the open market?”
Step two: If interest exists, engage a licensed broker for indicative offers. This is not a commitment to transact. It is information. Most brokers provide a soft-market assessment at no cost. Further, a broker has a fiduciary responsibility to the client and will consult with multiple buyers to ensure the client benefits from a competitive bidding process.
Step three: Document the conversation. Whether the client proceeds or not, note in the file that the question was raised, explored, and resolved. That documentation matters if questions arise later.
Step four: If the client proceeds, understand the transaction structure. A licensed broker, an escrow agent, a licensed settlement provider, and regulatory compliance are all part of a compliant transaction. The advisor’s role is coordination and client advocacy, not execution.
For the small subset of clients where a settlement is appropriate, these 30 minutes can mean a six- or seven-figure difference in the client’s financial outcome.
The Larger Point About Asset Awareness
Life settlements sit at the intersection of a broader problem in financial planning: The profession is built around accumulation and protection, but rarely around asset auditing.
A client’s life insurance policy is an asset. It has a market value that may differ substantially from its book value. The same is true of structured settlement payments, annuity contracts, and other financial instruments that advisors routinely treat as static.
The secondary markets for these assets exist. They are legal, regulated, and competitive.
The fiduciary question is not whether an advisor must use these markets. It is whether an advisor acting in a client’s best interest can responsibly pretend they do not exist.
I do not believe they can. And as the market matures and regulatory awareness grows, ignoring the issue will become increasingly difficult to defend.
What I Tell Advisors
I work with a network of approximately 600 advisors nationwide who refer clients to me when the settlement conversation is appropriate. My message to them is consistent:
You do not need to become an expert. You need to ask the question.
The client in front of you may be sitting on a six-figure asset they are about to abandon for a fraction of its value. One question protects them. That same question protects you.
It is simply: Have you explored the secondary market for this policy?
If the answer is no, now is the time to encourage them to do so.
Alex Barba is a licensed life settlement broker with 22 years of experience and founder of Lifeforce Financial. He is licensed in 47 states and closes approximately 50 transactions annually. He is based in Miami, Florida. His book, “Life Settlements: The Hidden Asset and the AI Shift,” is forthcoming. He can be reached at [email protected].
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
