The CPA’s role in advising clients about the value of life insurance assets

By Tracy Barrett, CPA, and John Dallas

Editor: Theodore J. Sarenski, CPA/PFS

Life insurance is a staple of any client's portfolio, regardless of age or income bracket, but it can also be a surprisingly valuable hidden asset for clients who are retired.

American seniors own roughly 38 million life insurance policies with a total "face value" of more than $3 trillion, according to the Life Insurance Settlement Association (LISA). Some of these policies were purchased when the insureds were young adults and just starting a family; others were purchased as their children grew and the insureds' financial needs were greater. Still others were purchased by empty nesters for tax planning purposes.

People purchase life insurance for many reasons, most often to provide an inheritance for their surviving spouse and children, protect their family from unpaid debts, help pay college expenses for their children or grandchildren, pay for their funeral expenses, or leave behind a charitable legacy. In many cases, the factors that originally motivated the purchase of the policy have changed over the years. Another consideration is that annual premiums that were once just another expense in the family budget may now pose a significant financial burden.

If clients own life insurance policies that they no longer need or can afford, a CPA financial adviser is in a unique and trusted position to advise them of their options. After all, life insurance is likely a significant—and often overlooked—asset in a client's portfolio.

Managing life insurance assets

The best way for clients to maximize the personal financial benefit from any life insurance policy is to collect the full policy benefit when the insured dies and the death benefits are paid out to the beneficiaries. So if a family needs the full cash benefit for personal financial, tax planning, or estate funding reasons, then the best advice advisers can give is to keep the policy in force. However, many people—including accountants and other financial advisers—are under the impression that life insurance policies have value to the owners only if they are held to maturity. This is simply not true.

Unfortunately, for decades, most seniors who no longer needed or could not afford their policies have simply defaulted to a "lapse" or "surrender" of the policy back to the insurance company. In fact, the number and amount of lapsed life insurance policies by Americans over age 65 is staggering: LISA reports that more than 250,000 policies with a combined face value of more than $57 billion lapse and are surrendered back to life carriers each year. And that includes only universal and variable life policies; if term life and whole life policies are added, the total exceeds $140 billion.

A client's life insurance policy is a major financial asset, and advisers should evaluate the policy just like any other asset. The CPA should determine whether the policy still serves its strategic purpose for the client or whether he or she can put the asset to work in a smarter way. If the policy is no longer needed or affordable, a number of sound options are available to convert it into an asset working for the client's benefit.

Restructure with retained death benefits

A client who does not want to continue paying premiums on a life insurance policy—but still wants or needs some life insurance coverage—may be interested in restructuring the policy in what is called a retained death benefit transaction.

Example: A 75-year-old client owns a life insurance policy with a $1,500,000 death benefit, but he does not want to continue paying the premiums and no longer needs the full benefit for his heirs. He might choose to sell $1,000,000 of the death benefit in exchange for a $500,000 retained death benefit. This means that even though he has sold his rights to the policy and no longer has to make another premium payment, his beneficiary will still receive $500,000 upon his death.

Leverage policy for accelerated benefits

Another option advisers can present to clients is to encourage them to explore ways to leverage the policy for immediate benefit through what is known as an accelerated death benefit. An accelerated death benefit can be attached to a life insurance policy and enables a client to essentially receive cash advances against the death benefit. It is sometimes referred to as a "living benefit rider" because the benefit is paid to the insured while he or she is still alive. These funds can be used to pay for medical expenses, including long-term care, and other personal financial needs.In most cases, the insured must have some sort of catastrophic or terminal illness to qualify for an accelerated death benefit, so its utility is limited to specific cases where the client is very ill.

Loans collateralized by the policy

If the client's life insurance policy has built up cash value, he or she may be able to access these funds through withdrawals or—more commonly—policy loans. Most insurance companies allow policyholders to borrow up to the policy's cash surrender value, minus the interest the insurer will charge for the loan. The interest on a policy loan is typically not actually paid on a current basis to the carrier as a car loan or credit card balance would be; it is generally added to the amount of the loan. Since the loan is collateralized by the life insurance policy itself, the policy owner is not required to repay it (although most companies will allow repayment of a life insurance policy loan at any time while the insured person is still alive). If the loan is not repaid, the insurance company will reduce the death benefit on the policy paid to the beneficiaries by the amount of the policy loan and the interest charges on that loan.

Sell the policy

Life insurance is personal property, so a client can sell it just like any other property. The buyer of the policy gives the client a lump-sum cash payment, takes over all future premiums on the policy, and then receives the death benefit when the client dies. This transaction—known as a life settlement—can enable the client to obtain roughly five to seven times the amount of the policy's cash surrender value, according to LISA. In fact, back in September 2005, the Journal of Accountancy recognized the emerging asset class of life settlements, with an appropriately titled article, "Turn ­Unneeded Policies Into Cash," 200-3 Journal of Accountancy 39 (September 2005), available at With the assistance of new technology tools and more sophisticated computer algorithms, the time required to complete a life settlement transaction is now often just a month or less.

Accountant's role in the sale of a policy

If a client is interested in exploring the sale of a life insurance policy, the next step is to reach out to qualified professionals who are experts in life settlement transactions. The LISA website ( provides access to a database of life settlement professionals who, as LISA members, are subject to a set of ethical standards of practice. These professionals have been required to attest annually that they are abiding by all life settlement laws, regulations, and ­ethical requirements.

Once the services of a qualified life settlement professional have been engaged to assist the client with selling the policy, just a few steps remain to consummate a successful life settlement transaction. There is often a brief application, an independent assessment of the client's life expectancy, and then an analysis of the policy's market value.

The CPA has an important role to play in the process as a trusted financial adviser. For example, if the potential buyer decides to extend an offer for the policy, it is important to understand that the client is still the owner of the policy and has the ultimate decision-making authority in whether to sell it. The CPA can review that offer with the client to help determine whether it represents a good deal for the client's family. (For more on how CPAs can assist in this process, see the sidebar, "How to Assist Clients Who Want to Sell a Policy.")

If the client accepts an offer to purchase his or her policy, the provider that made the offer will prepare a purchase and sale agreement, as well as other legal documents formalizing the transaction. Once all of the documents have been signed, the funds for the settlement transaction are placed in an escrow account; upon written verification of the change of ownership and beneficiary to the purchaser, the escrow agent releases the settlement payment, and the full payment for the policy is transferred into the client's bank account.

This is a data-intensive process that involves various documents. The CPA will need to perform key functions for the client, such as:

  • Obtaining information from the insurance company to calculate the client's basis in the policy;
  • Determining which tax forms the client can expect to receive and what to report at year end; and
  • Establishing which documents will be required to file for Sec. 101(g) exclusions for amounts received under a life insurance contract on the life of an insured who is terminally or chronically ill, if appropriate.

Finally, CPAs can play a crucial role as advisers to their clients in the sale of life insurance policies with respect to personal and business financial planning. Accountants frequently recommend life settlements for purposes of estate planning, tax planning, and charitable donation strategies, as they are likely to generate substantially more cash than the cash surrender value offered by the insurance company.

Presenting the options

CPAs have a unique role as trusted advisers in their clients' lives. CPAs know clients' most private financial information and often are called upon to walk them through difficult personal situations. This role gives them an important opportunity to objectively evaluate clients' assets and make suggestions where appropriate on how to maximize the value of those assets to their family's benefit.

One of the most overlooked—and misunderstood—assets that the authors see in portfolios every day is an old life insurance policy that has been lying around for years. If a client has a life insurance policy that is no longer needed or affordable, the CPA may be able to provide a tremendously valuable service by simply making clients in this situation aware of a number of smart options for what to do with that policy. Those options include restructuring the policy into a new one with a retained death benefit, seeking loans collateralized by the value of the policy, leveraging the policy for accelerated benefits to defray health care expenses, or perhaps selling the policy outright for an immediate cash payment.

Life insurance is often a major asset owned by clients. CPAs have a privileged opportunity to make sure clients' policies are serving their best financial interests today.   



Tracy Barrett is managing member of Agee Fisher Barrett LLC, an Atlanta-based accounting firm. John Dallas is CEO of Berkshire Settlements, a company that works with accountants to help maximize the value of their clients' life insurance assets, and a board member of the Life Insurance Settlement Association. Theodore Sarenski is president and CEO of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. Mr. Sarenski is chairman of the AICPA Advanced Personal Financial Planning Conference. He is also a past chairman of the AICPA Personal Financial Planning Executive Committee and a former member of the Tax Literacy Commission. For more information about this column, contact ­


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