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 can lose value they never knew existed, and trust beneficiaries may receive nothing when a sale could have produced a distribution. 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 the insurer sets the cash surrender value based on contractual formulas, not on what the policy may be worth to a licensed institutional buyer on the secondary market. A life settlement may produce more than the policy's cash surrender value, but results vary by case. A free evaluation shows whether a policy may have secondary-market value. See our cash surrender value vs. market value explainer and the life settlement glossary.
Hypothetical Illustration
An older client holds a universal life policy with a modest cash surrender value. The estate attorney recommends surrender because estate tax is no longer a concern, and the policy is surrendered. Had a licensed life settlement broker been consulted first, the policy might have attracted secondary-market offers worth more than the surrender value. Hypothetical illustration
The Fix
Before surrendering any policy in an estate, obtain a market valuation from a licensed life settlement broker. Qualified submissions may receive a preliminary valuation within approximately 24 hours after sufficient initial information has been received. If the market value exceeds the CSV, the client can make an informed decision rather than leaving potential value on the table. You can also request a life insurance policy review.
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 has risen substantially since 2001 (see the IRS estate tax page for current figures). 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 much higher federal estate tax exemption, 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 address the sale of trust-owned policies. Proceeds go to the trust and are distributed to beneficiaries. Our ILIT and trust-owned life insurance settlement guide covers the process in detail.
Hypothetical Illustration
An ILIT holds a survivorship (second-to-die) policy with little or no cash value. The couple's estate is well below the exemption threshold, and the trust attorney recommends surrender. Before surrendering, the trustee asks a licensed broker to market the policy to buyers, and any resulting sale proceeds are paid to the trust for the beneficiaries. Hypothetical illustration
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. Trustees owe duties to beneficiaries, and understanding the options is part of fulfilling them. Counsel should advise on the trustee's specific obligations.
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 (as modified by Revenue Ruling 2020-5) 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 (as modified by Revenue Ruling 2020-5) 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, the tax treatment of a life settlement may differ meaningfully from surrender. See our life settlement tax treatment page.
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. Disclosure rules vary by state, so confirm the requirements that apply to your client.
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 provides the data needed to make an informed recommendation. No fixed completion date is guaranteed. 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 in the sale of the policy, and we disclose how we are compensated.
Cases can be presented to multiple licensed institutional buyers so offers can be compared.
Experience with ILIT-owned, trust-owned, and entity-owned policies. See our licensing and disclosures page for state information.
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
Reviewing an estate plan that includes life insurance? Before any policy is surrendered, lapsed, or terminated — find out what it may be worth on the secondary market. No cost. No obligation. Confidential. Not every policy qualifies. Actual offers depend on policy characteristics, insured health, premiums, underwriting, and market conditions.
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. A life settlement may produce more than the policy's cash surrender value, but results vary by case. A free evaluation shows whether a policy may have secondary-market value.
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?
Eligibility depends on the policy type, face amount, and the insured's age and health, and buyers set their own thresholds. Survivorship (second-to-die) policies are evaluated on both lives. Not every policy qualifies for a life settlement. Eligibility and outcomes depend on policy characteristics, insured health, premiums, underwriting, and market conditions.
How long does the life settlement process take for trust-owned policies?
Qualified submissions may receive a preliminary valuation within approximately 24 hours after sufficient initial information has been received. Overall timeline varies with underwriting complexity, documentation availability, buyer requirements, and carrier processing. Estimated closing and funding timelines are communicated as the transaction progresses. Trust-owned policies can involve additional steps because the trustee must execute documents, trust counsel may need to approve, and the trust's documentation must be verified. No fixed completion date is guaranteed.
Related Reading