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

• Author: Sarenski, Theodore J.
• Position: Certified public accountant

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...