From Liability to Strategic Asset: A Fiduciary’s Roadmap to Life Settlements

By Scott Etish, Vice President, Advanced Markets at Coventry

Life insurance has long been central to estate and business planning, providing liquidity for estate tax, funding buy-sell agreements and ensuring smooth business succession, among other benefits. However, clients today face evolving challenges that could outweigh the usefulness of their policies. Fluctuating interest rates, ongoing inflation concerns, global economic uncertainty and sweeping legislative changes, such as the Tax Cuts and Jobs Act of 2017 and the more recent One Big Beautiful Bill Act, have placed increased focus on the role of life insurance as a financial planning strategy.

As a result, many advisors and their clients are seeking liquidity options for underperforming or unneeded policies. While traditional guidance steers toward native solutions built into the policy, such as cash surrender value, advisors are turning instead to life settlements. For fiduciaries, understanding and leveraging this option is no longer optional; it’s part of fulfilling their duty to clients and beneficiaries. 

What is a Life Settlement?

A life settlement is the sale of an existing life insurance policy to a third-party buyer for more than the policy’s cash surrender value but less than its death benefit. The buyer takes over premium payments and receives the death benefit when the policy matures.

While the secondary market has matured significantly, many fiduciaries still hold outdated views or lack familiarity with it. In reality, today’s life settlement industry is transparent, well-regulated and fueled by institutional capital, making it a viable option for policyowners seeking an alternative to a lapse or surrender.

A Regulated and Evolved Market

Currently 43 states regulate life settlements, requiring providers and brokers to be licensed, mandating disclosures and protecting consumer rights.

For example, Pennsylvania’s Viatical Settlements Act includes:

• Licensing: All settlement providers and brokers must be licensed by the Pennsylvania Insurance Department (40 P.S. § 626.3).

• Disclosures: Providers must give written disclosures at application, including alternatives, tax implications, and potential effects on government benefits (40 P.S. § 626.7).

• Right to Rescind: Sellers can cancel within 15 days of receiving the settlement proceeds (40 P.S. § 626.8).

• Privacy Protections: Confidentiality rules protect insureds' personal and financial information (40 P.S. § 626.6).

These safeguards, combined with today’s economic climate, make it essential for fiduciaries to periodically reevaluate life insurance's role as a dynamic, actively managed asset.

Fiduciary Duty and the Need for Appraisal

Trustees are bound by duties of prudence, loyalty and impartiality. When life insurance is part of a trust, it requires active oversight, just like any other investment. That means reviewing performance, monitoring costs and ensuring alignment with trust objectives.

Pennsylvania law reinforces these obligations:

• Good Faith Administration: Administer the trust according to its terms and applicable law (20 Pa. C.S.A.§ 7771).

• Prudent Investment Standards: Manage assets as a prudent investor would, considering the trust's purpose, terms and distribution needs (20 Pa. C.S.A. § 7203).

• Loyalty to Beneficiaries: Act solely in the beneficiaries' interests (20 Pa. C.S.A. § 7772).

• Duty of Disclosure: Keep qualified beneficiaries reasonably informed and provide material facts necessary to protect their interests (20 Pa. C.S.A. § 7780.3).

In practice, this requires regular reviews of in-force illustrations, monitoring for potential lapses and adjusting premiums when necessary, among other responsibilities. Proactive appraisal helps ensure policies remain aligned with the trust’s objectives and that trustees are fulfilling their responsibilities. Through these measures, trustees can ensure that life insurance continues to support the intended planning purpose and remains a prudent trust asset.

Litigation Lessons for Fiduciaries

In Grill v. Lincoln National Life Insurance Company, a trustee instituted a class action against a carrier, asserting that the carrier had a systematic practice “of failing to inform and/or concealing from its insureds the option of a life settlement in connection with their life insurance policies.”  [Complaint].  The federal district court in California acknowledged the significance of these issues, recognizing that policyowners should be provided information about life settlements before surrendering their insurance for the cash value.  The Grill matter was resolved before class certification or summary judgment, but similar allegations were made in Joseph v. Kaye, et al., Case No. SC125276 (Cal. Super. Ct. 2016).

In Graham-Bingham Irrevocable Trust v. John Hancock Life Ins. Co. USA, 827 F. Supp. 2d 1275 (W.D. Wash. 2011), the Western District of Washington examined allegations that failing to provide adequate notice of life settlement options violated Washington’s disclosure laws, consumer protection statutes and duties of good faith. John Hancock argued that the policyowner was already aware of the secondary market and had unsuccessfully tried to sell the policy, but the court declined to grant summary judgment, leaving the claims to proceed before ultimately a settlement was reached.

These cases underscore the growing recognition that life insurance can hold market value far beyond its cash surrender value, and that policyowners should be kept informed of all viable options to access that value—including life settlements.

When Should a Fiduciary Seek an Appraisal?

Consider a life settlement appraisal when any of the following are present:

• A policy is approaching a lapse or surrender

• Premium payments are no longer sustainable or justified

• The insured’s health has declined

• A policy is no longer aligned with its original purpose (e.g., estate tax planning or business protection)

• A trust requires liquidity or diversification

Fiduciary Best Practices Checklist

To mitigate liability and uphold fiduciary standards, trustees should:

1. Perform Document Reviews: Maintain detailed records of all policy reviews, applying the same rigor to them as to other trust assets.

2. Seek Independent Valuations: Whenever lapse or surrender is on the table, obtain a life settlement appraisal from an independent provider.

3. Engage Professional Support: Work with licensed life settlement providers who are current on market practices and regulatory requirements.

4. Communication with Clients: Explain the rationale for recommendations involving trust-owned life insurance, especially when outcomes may affect trust value.

5. Confirm Regulatory Compliance: Ensure all parties comply with state licensing and disclosure rules.

Conclusion: A Growing Expectation in the Fiduciary World

As awareness of the life settlement option continues to expand, courts and beneficiaries will increasingly expect trustees to present life settlements as an alternative to a lapse or surrender. Ignorance is no longer a viable defense, and beneficiaries may fault a fiduciary who allows a policy to lapse without first raising this option with key decision-makers.

Life insurance should not be viewed as a static tool any longer. It is a flexible and dynamic asset within a broader financial plan. Life settlements will not be right in every case but including them in the review process helps fiduciaries better serve and deliver better outcomes for their beneficiaries. Proactive steps strengthen fiduciary practice and build trust and transparency with beneficiaries.

Key Takeaways

• A life settlement appraisal should be considered whenever a lapse or surrender is on the tabllement appraisal should be considered whenever a lapse or surrender is on the table.

• Evaluating the secondary market helps fiduciaries demonstrate prudence and foresight.

• Consideringe.

• Evaluating the secondary market helps fiduciaries demonstrate prudence and foresight.

• Considering the secondary market can transform life insurance from a perceived liability into a strategic, value-adding asset.

The bottom line for professionals is that by advising fiduciary clients to be proactive, seek independent appraisals, communicate openly with their beneficiaries and treat life insurance like any other investment, they can safeguard their clients and reinforce their standing as thoughtful, informed advisors.

Scott Etish, Esq., is Vice President, Advanced Markets at Coventry First, where he works with attorneys and fiduciaries who advise high-net-worth clients on complex estate and financial planning matters. Mr. Etish specializes in helping legal and financial professionals unlock the hidden value of their clients’ unneeded life insurance policies, providing alternatives to a policy surrender or lapse that can generate liquidity, reduce premium burdens, and enhance wealth transfer strategies.  Before joining Coventry, Mr. Etish was a Partner at Gibbons P.C., where he spent nearly 17 years advising clients on complex business disputes.