Cash You Didn’t Know You HadIf you have a life insurance policy and certain conditions are met, you may be sitting on a BIG pot of cash without even knowing… A life settlement generally refers to the sale of a life insurance policy by a policyowner for less than the face value of the policy to third party investors. The third party investor(s) plans to profit at death of the insured by collecting more in death benefits that were paid out (e.g., the purchase price, the transactions costs, and premiums). This translates into higher profits the sooner the policy holder dies. A "viatical settlement" is the same as a life settlement except the insured is chronically or terminally ill (as defined by the IRS Code). Transactions of this type have been available for Americans since 1911. Aids sufferers created a small market in the 1980's when their policies were sought out by speculators. The credit crisis has seen a rise of elderly Americans for whom their life-insurance policy is one of their more valuable assets. The Economist reports estimates of it being a $18-19 billion market as of June, 2009. The following was provided by the life settlement industry: Generally speaking, life settlements are an option for high-net-worth policy owners age 70 or older. Independent estimates report that among this group, over 50% of policies have a market value that exceeds the cash value offered by the carrier. A growing number of experts now believe that informing clients about offering life settlements should fall under the fiduciary duty of a financial adviser. With this being said, those established in the industry are now placing an emphasis on life settlement education for financial professionals so that they can accurately present the life settlement option to all clients who might benefit from it. Typical criteria for the owner of a life insurance policy to become an eligible candidate for a life settlement transaction would include: Policy holders age 70 and older (ages as low as 55 are possible) Insurance Policy Types:
Three typical examples of the characteristics of a Life Settlement Transaction are given below: Universal Life Insurance
Universal Life Insurance
Whole Life Insurance
Financial advisers Life settlements are complex financial transactions that are generally conducted on behalf of clients by experienced professional advisers. Some examples of advisers that are becoming increasingly involved in the life settlement arena are: Accountants/CPAs Providers Life settlement providers serve as the purchaser in a life settlement transaction and are responsible for paying the client a cash sum greater than the policy's cash surrender value. The top providers in the industry fund many transactions each year and hold the seller's policy as a confidential portfolio asset. They are experienced in the analysis and valuation of large-face-amount policies and work directly with advisors to develop transactions that are customized to a client's particular situation. They have in-house compliance departments to carefully review transactions and, most importantly, they are backed by institutional funds. Life Settlement providers must be licensed in the state where the policy owner resides. Approximately 41 states have regulations in place regarding the sale of life insurance policies to third parties. Brokers Financial advisors who choose not to submit cases directly to a settlement provider may opt to work through a life settlement broker. Life settlement brokers are intermediaries who bring together policyowners who wish to sell a policy and providers seeking to purchase them. Brokers, in exchange for a fee, will shop a policy to multiple providers, much as a real estate broker solicits multiple offers for one’s home. Not all buyers are alike and a life settlement broker will help ensure that cases are sold to reputable buyers who are likely to close without significant difficulties. It is unlikely a financial advisor will achieve the highest possible price without going through an experienced life settlement broker. While it is the broker's duty to collect bids, it is still incumbent on the advisor to help the client evaluate the offers against a number of criteria including offer price, stability of funding, privacy provisions, net yield after commissions, and more. Compensation arrangements vary significantly and should be fully disclosed and understood to determine if engaging a broker will benefit the client. In many states, brokers must be licensed to do business in that state. In regulated states there are material regulations as to procedure, privacy, licensing, disclosure and reporting which must be met and which in some cases carry criminal penalties. Investors / risk takers Life settlement investors are known as financing entities because they are providing the capital or financing for life settlement transactions (the purchase of a life insurance policy). Life settlement investors may use their own capital to purchase the policies or may raise the capital from a wide range of investors through a variety of structures. The life settlement provider is the entity that enters into the transaction with the policyowner and pays the policyowner when the life settlement transaction closes. In most cases, the life settlement provider has a written agreement with the life settlement investor to provide the life settlement provider with the funds needed to acquire the policy. In this scenario, the life settlement investor is effectively the ultimate funder of the secondary market transaction. However, in some life settlement transactions, the life settlement provider is also the investor; the provider uses its own capital to purchase the policy for its own portfolio. Here is one such life settlement provider and what they have to say: Until recently, the only options for libucksating an underperforming or unneeded policy was to let it lapse, sell it back to the original insurer for its current net cash surrender value, or exercise a policy non-forfeiture option. But thanks to an increasingly competitive secondary market, known as life settlements, life insurance is no longer being treated as simply a death benefit. Like other types of personal holdings, life insurance has evolved to become an asset with a fair market value and may be sold by its owner at a market price higher than its net cash surrender value under specified circumstances. This sale of an insured’s existing life insurance policy to a third party known as a life settlement provider in exchange for a lump sum cash payment is called a life settlement. A life settlement is for an individual who does not have a catastrophic or life-threatening illness or condition. In a life settlement, the sale price is less than the policy’s face value, but is higher than the policy’s net cash surrender value. Upon selling one’s insurance policy to a life settlement provider, the policy owner is relieved from making future premium payments. Now, instead of retiring a life insurance policy for its net cash surrender value, letting it lapse, or exercising a non-forfeiture option, you can sell the policy and use the money you receive through the transaction to fund other investments, make cash donations to a charity of your choice, supplement your retirement nest egg or income, purchase replacement life insurance, if needed, or provide education funds to a deserving family member. Life settlements can offer access to financial resources and provide you with a way to enhance your current cash position, eliminate your premium payment obligations, extract value from a potentially underperforming asset, and reduce or eliminate your debt. |