Life Settlements and Fiduciary Responsibility

Clock April 01, 2022


Every day, financial advisors have clients who consider surrendering a life insurance policy for its cash value. Whether the policy is no longer needed, or the premiums have become too burdensome, clients often believe surrendering a policy is the best (and only) way to realize value from their life insurance. However, as you likely know, a life settlement often generates much more value for the policyholder than surrendering a policy.

This presents a great opportunity for you to provide additional value to your clients. And while having a conversation about life settlements is good for your clients as well as your business—it’s also a good practice that can help you fulfill your fiduciary duty.

What is fiduciary duty?

Financial advisors are well aware of, and adherent to, their fiduciary duty—the legal and ethical responsibility to act in the best interest of another person, persons, or entity, by putting their clients’ financial interests ahead of their own.

Because of this, clients have confidence that they can trust you to make sound financial recommendations on their behalf and that those recommendations will be the best options for achieving their financial goals.

However, if a financial option exists that better meets the needs of a client, failure to act in their best interest by exploring that option could be considered a breach of fiduciary duty. For example, if a client is considering surrendering a life insurance policy back to the insurance carrier, exploring alternatives to monetize the policy should be explored. Not doing so could result in a lower payout from the termination of a policy than the policyowner could have otherwise received in a life settlement transaction.

How does fiduciary duty apply in life settlements?

Fiduciary duty in relation to life settlements and life insurance has legal precedence. In the 2014 lawsuit Larry Grill, et al. v. Lincoln National Life Insurance Co., the plaintiffs claimed that their broker had purposefully not educated them about life settlements as an option for policy termination, knowing that the insurance company profits more when policies are surrendered instead of sold. When the plaintiffs asked for recommendations on how to manage their increasing premiums, the broker never mentioned that they could potentially earn more by selling their life insurance policy. As a result, they chose to surrender it.

The case was eventually settled out of court. However, the courts confirmed that a failure to disclose information about life settlement options could be considered financially damaging to the policyholders.

Financial advisors, as well as trustees of irrevocable life insurance trusts (ILIT), have a responsibility to educate clients who own life insurance policies about the asset and their options when terminating a policy. When a client expresses an urgent need to generate funds or a desire to lapse or surrender their policy, providing relevant information about their choices—including how much their life insurance policy could be worth in a life settlement—is crucial.

Get a life settlement estimate for your client’s policy

Considering a life settlement for one of your clients? Getting an estimate is an excellent place to start. Lighthouse Life offers an online calculator to help you determine how much your client’s policy could be worth in a life settlement.

If you have any questions, call us at 1-855-230-0800 and we’ll be happy to provide you with the resources you need to present life settlements as a lapse or surrender alternative to your clients.

Life Settlement Estimate Calculator