- What's at stake: Clients who passively allow life insurance policies to lapse or accept surrender values could be leaving substantial capital on the table.
- Expert quote: "You have to be willing to drop your previous financial plan that the life insurance policy was a tool inside of. … You have to be willing to drop that tool to get cash now." — Matthew Smart, WWM Investments
- Supporting data: Life settlements yield an average of 8.71 times more than a policy's cash surrender value, based on Life Insurance Settlement Association market data from 2025.
Clients who no longer need their life insurance policies can let their policies lapse, or they can offload those policies more profitably by liquidating them or getting a life settlement.
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Understanding the options can increase a financial advisor's value to clients who may need or want cash infusions — especially as people live longer lives.
The reasons a client purchased life insurance in the first place may no longer apply. A client might have purchased a policy when married but gotten divorced. Or a client who formerly owned real estate properties may have gotten life insurance to offer liquidity to heirs, advisors said.
"I think with a good advisor … many people would not allow it to lapse. There's a lot of other options available to them, but that does happen on occasion," said Jason Stephens, founder and managing partner at Naples, Florida-based registered investment advisor Evertern Wealth.
Bryan Nicholson, executive director at the Life Insurance Settlement Association (LISA), a Washington-based trade organization, said life settlements tend to yield 8.71 times more than the surrender value of a policy, based on LISA's 2025 data.
Life settlements have become a bigger topic over the past five to 10 years, Stephens said, as individuals live longer than expected.
"In some cases, [because] inflation has ticked up, they may need the dollars more today in their hand versus what they originally had thought," Stephens added.
Changes to tax laws can also affect the decision.
Other points to consider, Stephens said, include whether the client qualifies for a life settlement given age and health factors — they might make sense if a client is in his or her 70s or 80s or has a major health issue. Also, consider whether the policy is in an irrevocable trust. If it is, trustees such as children might need to be part of the decision.
Potential variations on the plan
Another possibility is to do a partial life settlement by making the life settlement company the beneficiary for 50% of the death benefit, said Matthew Smart, chief investment officer of Chicago-based wealth management firm WWM Investments.
Some life insurance policies have long-term care insurance riders, and if clients still want these riders, they might want to keep the policy.
"If you give up that policy, you have now removed that part of your planning from your life," Smart said. "You have to be willing to drop your previous financial plan that the life insurance policy was a tool inside of. … You have to be willing to drop that tool to get cash now."
Could life settlements be tax-free in the future?
In addition to conferring with their financial advisors, clients should speak with their tax advisors about the potential implications of liquidating their life insurance policies or taking life settlements.
Meanwhile, LISA has advocated for the transactions to be tax-free.
However, "we're not quite there yet, and certainly, it would be a component of the same financial planning-type discussion to evaluate the tax considerations and the way in which proceeds derived from the life settlement would be brought back and applied to things like long-term care and healthcare costs for someone that remains living," Nicholson said.
Sometimes, life settlement proceeds are already untaxable, depending on the client's health conditions.
"Those parameters are difficult to lump into clean boxes," Nicholson said.
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Zoe Sagalow covers tax and retirement issues for Financial Planning, bringing a decade of experience in financial policy and regulatory reporting to... Read full bio