The Overlooked Asset in Every Estate Plan
Estate planning is one of the most important — and most complex — services financial advisors provide. It requires coordination across legal, tax, investment, and insurance disciplines. When done well, it preserves wealth across generations. When done poorly, it destroys it.
Yet there is one asset class that even experienced estate planners routinely mishandle: existing life insurance policies.
Life insurance often represents the single largest asset in an estate plan — yet it is frequently the last to receive a thorough review. Policies purchased decades ago under vastly different tax laws and family circumstances are carried forward on autopilot, surrendered for pennies on the dollar, or allowed to lapse with no analysis of alternatives.
The consequences are real. Clients lose hundreds of thousands of dollars. Trust beneficiaries receive nothing when they could have received substantial distributions. And advisors who fail to present all available options may face questions about whether they fulfilled their fiduciary obligations.
Below are the five most costly mistakes estate planning professionals make with existing life insurance — and the straightforward steps to avoid each one.
Treating Surrender as the Only Exit
When a policy is deemed “no longer needed” in an estate plan, the default response for most advisors is simple: surrender it. The client receives the cash surrender value (CSV), the policy terminates, and the planning moves on.
The problem is that cash surrender value is almost always a fraction of the policy's potential secondary-market value. The insurance company sets the CSV based on contractual formulas — not based on what the policy is actually worth to a licensed institutional buyer on the secondary market.
Real-World Example
A 78-year-old client held a $1.5 million universal life policy. The estate attorney recommended surrender because estate tax was no longer a concern. Cash surrender value: $35,000. The policy was surrendered. A subsequent review by a licensed life settlement broker determined the policy's market value was approximately $280,000 — eight times what the client received.
The Fix
Before surrendering any policy in an estate, obtain a market valuation from a licensed life settlement broker. This takes days, costs nothing, and gives the client a complete picture of their options. If the market value significantly exceeds the CSV — which it does in the majority of cases involving seniors aged 70+ — the client can make an informed decision rather than leaving money on the table.
Ignoring Life Insurance During Estate Reviews
Most estate plans include life insurance. Fewer estate reviews actually examine those policies. The typical review focuses on trusts, beneficiary designations, asset titling, and tax strategies — while the underlying insurance policies go unexamined year after year.
This is a critical oversight. Policies purchased 15 or 20 years ago were designed for a different world:
- The federal estate tax exemption was $675,000 in 2001. Today it is $13.61 million per person (2024). Policies purchased for estate tax liquidity may no longer serve that purpose.
- Interest rate assumptions in universal life illustrations from the 1990s and 2000s have proven wildly optimistic. Policies are underfunded and at risk of lapse.
- Family circumstances change — divorces, deaths, estrangements, business sales — rendering original coverage needs obsolete.
- Health changes affect policy economics. A client in declining health may hold a policy worth far more on the secondary market than its ongoing utility to the estate.
The Fix
Include life insurance as a formal line item in every estate review — not just a mention, but an active evaluation. Request a current in-force illustration from the carrier. Compare the original purpose of the policy to the client's current situation. If the policy no longer aligns with the plan, explore all available options including the secondary market.
Terminating ILIT Policies Without Exploring Alternatives
Irrevocable Life Insurance Trusts (ILITs) were the cornerstone of estate tax planning for decades. When estate tax exemptions were low, ILITs removed the death benefit from the taxable estate while providing liquidity to pay estate taxes.
With today's $13.61 million per-person exemption ($27.22 million for married couples), many ILITs are no longer serving their original purpose. The trust still owns the policy. Premiums are still being paid — often from gifts that consume the grantor's annual exclusion. And the trustee faces a question: what do we do with a policy the trust no longer needs?
Too often, the answer is to simply surrender the policy. The trust receives the CSV — sometimes as little as zero for term conversions or COI-heavy universal life policies — and the trust is terminated.
What many trustees and their counsel don't realize is that ILITs can sell policies through a life settlement. The Life Insurance Settlement Association (LISA) and the NAIC Model Act both recognize trust-owned policy sales as a legitimate transaction. Proceeds go to the trust and are distributed to beneficiaries.
Real-World Example
An ILIT held a $3 million survivorship (second-to-die) policy. The couple's combined estate was well below the exemption threshold. The trust attorney recommended surrender. Cash surrender value: $0 (policy was a guaranteed-issue survivorship product with no cash accumulation). A licensed broker obtained competitive bids and settled the policy for $520,000 — paid directly to the trust for the benefit of three adult children.
The Fix
Before any trust-owned policy is terminated, engage a licensed life settlement broker to determine market value. This applies to individual policies, survivorship policies, and even term policies that are convertible. The trustee has a duty to maximize value for beneficiaries — and a life settlement may be the path to fulfill that obligation.
Overlooking the Tax Implications of Different Exit Strategies
The tax treatment of a policy disposition varies significantly depending on the exit path chosen. Many advisors treat all exits as equivalent — but they are not. The three primary options each carry distinct tax consequences:
Lapse (stop paying premiums)
If the policy has outstanding loans or gains above basis, the lapse triggers taxable ordinary income — even though the client receives no cash. This is the 'phantom income' problem that catches many policyholders off guard.
Surrender (return policy to carrier)
Gain above cost basis (total premiums paid less dividends received) is taxed as ordinary income. The client receives the CSV minus any loans, and pays tax on the gain.
Life settlement (sell on secondary market)
Under IRS Revenue Ruling 2009-13 and the Tax Cuts and Jobs Act (2017), gain is bifurcated: the portion up to the 'inside buildup' (CSV minus basis) is ordinary income, and the portion above CSV is taxed as long-term capital gains. In many cases, this results in a more favorable overall tax outcome than surrender — and the client receives substantially more gross proceeds.
The IRS Revenue Ruling 2009-13 clarified the tax treatment of life settlements, and the 2017 Tax Cuts and Jobs Act further defined basis calculations. Estate planners who are unfamiliar with these rules risk recommending an exit strategy that is both financially and tax-inefficient.
The Fix
Model all three exit options — lapse, surrender, and life settlement — with a qualified tax advisor before recommending a path. Compare net after-tax proceeds for each scenario. In cases where the policy has significant gains above basis, a life settlement's capital gains treatment on the excess above CSV can save the client tens of thousands in taxes.
Failing to Document the Decision
Whether the ultimate decision is to keep, surrender, exchange, or sell a policy — the process and rationale must be documented. This is where many estate planning teams fall short.
Life settlements are still unfamiliar to many practitioners. If a client later discovers — perhaps through a competitor advisor, a news article, or a family member — that their policy could have been sold for significantly more than they received through surrender or lapse, the absence of documentation creates real liability.
The American College of Trust and Estate Counsel (ACTEC) has noted the growing importance of documenting fiduciary decisions around policy disposition. State insurance regulators increasingly expect that policyholders be informed of their right to sell a policy before it is surrendered or lapsed — several states now require disclosure of this option.
Liability Scenario
An advisor recommends surrendering a $2M policy for $40,000 CSV. Two years later, the client's son — an attorney — asks why a life settlement wasn't explored. The advisor has no written record showing the option was considered or presented. The client files a complaint. Without documentation, the advisor has no defense. With documentation showing the option was presented and the client chose to surrender, the advisor is protected.
The Fix
Maintain a written record of every policy review. Document: the policies reviewed, their current status and values, all options presented (including life settlement), the client's questions and concerns, and the final informed decision. Have the client sign an acknowledgment. This protects the advisor, demonstrates fiduciary diligence, and ensures the client made a truly informed choice.
A Better Approach: The Estate Policy Review Checklist
Avoiding these five mistakes doesn't require a complete overhaul of your estate planning process. It requires one addition: a systematic policy review protocol. Use this checklist for every estate that includes life insurance:
Pro tip: Steps 5 and 6 are where most value is captured — and where most advisors stop short. A complimentary market valuation from a licensed life settlement broker takes just days to complete and provides the data needed to make an informed recommendation. Use our life settlement calculator for a quick preliminary estimate.
How Accelerated Life Solutions Supports Estate Planners
At Accelerated Life Solutions, we work alongside estate planning attorneys, CPAs, financial advisors, and trustees to ensure no value is left on the table when policies are reviewed. Our role is specialized and complementary — we handle the life settlement expertise so your team can focus on the broader estate strategy.
We represent the policyholder and trustee — never the buyer. Our fiduciary is aligned with yours.
Every case is marketed to multiple licensed institutional buyers to maximize the settlement offer.
Extensive experience with ILIT-owned, trust-owned, and entity-owned policies across all 50 states.
We provide written valuations, bid summaries, and decision records to support your fiduciary file.
Whether you're reviewing a single policy or auditing an entire estate portfolio, we provide the market intelligence and transaction expertise to help your clients make fully informed decisions. Learn more in our Advisor's Complete Guide or visit the Advisor Knowledge Center.
Estate Plans That Include Life Insurance
Request a Complimentary Market Valuation
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Request Valuation for Estate PolicyFrequently Asked Questions
Can a trust-owned life insurance policy be sold through a life settlement?
Yes. Irrevocable life insurance trusts (ILITs) can sell policies on the secondary market. The trustee must have authority to sell trust assets — most trust documents grant this power, but counsel should confirm. The settlement proceeds are paid directly to the trust and distributed according to the trust's terms.
Who receives the proceeds when an ILIT policy is sold?
The life settlement proceeds are paid to the trust itself. From there, the trustee distributes funds to the trust beneficiaries according to the terms of the trust agreement. In many cases, beneficiaries receive hundreds of thousands of dollars that would otherwise have been lost through surrender or lapse.
How does a life settlement affect estate tax calculations?
Because the policy is owned by the ILIT and not the insured, settlement proceeds remain outside the taxable estate. The transaction itself does not trigger estate tax. However, the proceeds held in the trust may be subject to income tax on any gain above the policy's cost basis. Always consult a tax advisor for case-specific guidance.
Is there a minimum policy size for estate planning life settlement cases?
Generally, policies with a face value of $250,000 or more are viable candidates for a life settlement. For estate planning cases involving survivorship or second-to-die policies, the minimum is typically $500,000 or more. Larger policies tend to generate more competitive bidding and higher offers relative to face value.
How long does the life settlement process take for trust-owned policies?
Trust-owned policies typically close in 90 to 150 days from application submission. The timeline is slightly longer than individually owned policies because the trustee must execute documents, trust counsel may need to approve, and the trust's EIN and documentation must be verified. Working with an experienced life settlement broker helps streamline the process.