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How Much is Your Client’s Life Insurance Policy Really Worth?

December 9 2014

By Cary B. Stamp, CFP, CDFA, AIF

In my experience as a CDFA and financial advisor, most of the parties in our divorce cases own some type of life insurance. Usually, the parties own term life insurance policies which have a defined expiration date but frequently these policies contain a conversion feature. The usual practice in valuing these policies is to place a value of Zero on the financial affidavit for term policies and to use the current cash value figure for universal or whole life policies.  As a CDFA, you have an obligation to educate your attorney partners and their staff that if they use this technique, they may be opening themselves to a malpractice case.

To protect yourself and the family lawyer, if you do not have an appraised or actual value for a life insurance policy, it is a good practice to indicate the value is “to be determined” if your client is required to file a financial affidavit. This issue has gained traction since a couple in California filed a suit against Lincoln National for the insurer’s alleged failure to advise them of the life settlement option. The couple in question had a $7.2 million policy and they were struggling to pay their premiums. Their agent agreed to help them reduce the face amount of the policy to $2 million but did not advise them that they actually had the option to sell the policy. The insured’s allege that Lincoln prohibits their agents from advising policy owners about the life settlement option because it would be contrary to Lincoln’s interest to keep the policy on the books. In this case, the claim the damages are in the millions of dollars.


The challenge comes when making financial disclosure or valuing the assets of the other party in a divorce. If the attorney’s office has been charged with the financial disclosure, they may list the value of a life insurance policy as the same as the cash value. These life insurance policies may have substantially more value than originally thought.

While it might seem surprising that a policy with no cash value could have a significant “actual” value, the need exists to value term policies as well. If you are working on a case where the parties are in their 60’s or older (or a younger person whose health has been impaired), it makes sense to speak with a valuation expert and ask about policies owned by the parties. Many term policies have a “conversion feature,” which can allow the holder to turn them into permanent policies, either whole life or universal life. Once converted, these plans could then be sold as life settlements for more than their cash values.


The Life Settlement market has created new opportunities for owners of life insurance by creating a secondary market where policies can be bought and sold. The market is very competitive as many firms will compete to buy a high quality policy on an older person or couple. It works like this—as an advisor, you discover a policy owned by your client or their spouse. You reach out to a life settlement firm and provide them with some information on the parties. This may be a little tricky because to accurately value the policy may require the need to review medical records. In a divorce case, it is often difficult to impossible to have one spouse give up their medical records to prove that their life insurance has a greater value. A skillful lawyer could point out to the judge, often by using an expert, that the policy has greater value than suspected, so the records are integral to the valuation or even ask that their client be awarded the policy in the settlement agreement.  The life settlement firm will shop the policy to different institutional buyers, often hedge funds, and come back to you with various offers if the policy proves valuable.  You can certainly share the policy information with more than one life settlement firm but you would be wise to advise them because they will often show the policy to the same buyers. As a CDFA, you can now use this information to make sure your client receives a fair settlement.

The key to this type of transaction is that the policyholder is selling the policy for more than its cash surrender value, but less than its net death benefit. There is a growing industry of institutional companies’ buyers, including some leading domestic and global pension plans, private equity, and hedge funds that are willing to pay large sums for these policies.

I recently spoke with Jon Mendelsohn, CEO of Ashar Group, a national licensed firm in the life settlement market. He shared an example how, a $1 million Universal Life insurance non-term life insurance policy that might have a cash value of $25,000 – but could likely potentially be sold to a 3rd party buyer for as much as $300,000 or more

That difference of $275,000 would be inadvertently forfeited by an attorney who does not exercise due diligence in looking into the true value of a client’s policy.

While there are no defined rules, usually the best candidates for these types of settlements are people over age 70 with fixed universal, index universal or whole life policies. Many buyers will not consider variable policies of much value but they should still be evaluated.  Even if your clients are in their 60’s, it may still be wise to ask for the policies in a settlement because if they have the ability to pay the premiums for a few years, they can then sell the policies in the marketplace.  Additionally, many of these policies have enormous flexibility for tax deferral and as a place to park cash in a low interest rate environment. I recently ran across an old group universal policy owned by a client that allowed a very significant cash deposit at a minimum guaranteed interest rate of 4%. There was no mortality charge on the excess cash so the client was able to invest in an account guaranteed by the insurance carrier that would never go lower than 4% interest. If you have a divorcee struggling to find places to generate income, that type of policy could offer tremendous benefits.

As a Certified Divorce Financial Analyst (CDFA), we have an obligation to bring this type of information to our clients and family lawyers. You should conduct a thorough evaluation to find out exactly how much your client’s policy may be worth. At the very least, if you do not know the value of a policy or it is a term policy, save yourself a potential malpractice claim and enter “TBD” on your client’s financial affidavit.


Cary B. Stamp, CFP®, CDFA™ is an independent financial planner and Certified Divorce Financial Analyst based in Tequesta, Florida. He is a graduate of the University of Iowa and the DePaul University Financial Planning program. He has worked with individuals and families since 1990 and has offices in Chicago and Palm Beach County. After working with a Boca Raton based family lawyer on his financial plan, he recognized the need for an advisor to work with wealthy women going through the divorce process. His firm, Cary Stamp & Co., offers a concierge level service to women clients, entrepreneurs, real estate developers and family lawyers. Cary Stamp & Co. is licensed for securities or insurance services in over 20 states. For more information you may visit www.mypalmbeachdivorce.com or www.palmbeachfinancialplanner.com