Familiarize Yourself With The Option of a Life Settlement (Part 2)

Familiarize Yourself With The Option of a Life Settlement (Part 2)

This is Part 2 of a three part series presented by Integrity Life Solutions and Integrity Life Settlements
  Part 1 can be viewed at http://www.freecpe.org/life/senior-life-insurance-settlements

Why would an individual or trust want to sell a life insurance policy? For the same reasons that an individual would cash in or lapse a policy. They may no longer want or need the policy – their beneficiaries have pre-deceased them, their children are grown and independent, their estate has diminished and their potential estate tax has decreased or disappeared, or their company has been sold and a buy-sell agreement is no longer applicable. They may no longer be able to afford the premiums - their retirement assets have diminished and are no longer producing enough income to cover the premium payments, or they need the money they were using for  premiums to pay for other expenses like long term care or nursing home expenses.  Or, they simply may need cash. Often their goals have changed and rather than leaving money to their beneficiaries, they want more cash to supplement their own living expenses.  Sometimes older individuals live longer than they had planned for. But, in fact, they could need the cash for innumerable other reasons. Consider this example closely. An owner of a 20 year term policy may never have had the intention of converting it to a permanent policy, a feature that exists on most term policies, and is now letting it lapse. But your client may instead have the ability to sell the policy to an investment company which will then convert the policy for their own benefit after the sale. Your client could be walking away from thousands of dollars because of his ignorance, and of course the carrier will be "laughing all the way to the bank" now that its obligation to pay any death benefit has ceased. Alternatively, the client may still want to have insurance, and need insurance, but the current policy may not fill his needs. A new policy may offer more bells and whistles, such as a death benefit guarantee or a longer death benefit guarantee.  Internal costs of insurance have decreased in newer policies. So, the client is considering exchanging the current policy for a new one in the context of a 1035 exchange of the cash value. However, even after consideration of the tax advantages under section 1035, it may be more lucrative to sell his current policy (likely a taxable event) if the sale price is much greater than cash surrender value of the existing policy. Many life settlements, in fact, result in cash payments to sellers of amounts in excess of 4 or 5 times the cash surrender value.
What kind of policies sell?  All kinds of policies, including term policies, as long as they are convertible to a permanent policy.  Some policies, however, are more marketable than others.  The sale price is dependent upon at least these 5 variables: (1) the face of the policy (the amount of the death benefit), (2) the life expectancy (LE) of the insured, (3) the cash surrender value (if any), (4) the insurance company's rating or credit worthiness and (5) the cost to keep the policy in force – projected premium payments. The death benefit, cash surrender value and the credit rating of the issuing insurance company are fairly simple and straight forward. The life expectancy of the insured is very much the crux of the issue. Obviously, the shorter the life expectancy, the greater the buying price as a percentage of the death benefit. This is because the shorter the life expectancy, the sooner the secondary buyer or new owner will collect the death benefit and less in premiums needed to carry the policy forward.  As to premiums, buyers require up-to-date illustrations from the carriers indicating how much they should expect to pay over the coming years, through expected maturity (or the LE year); Buyers will always want to pay the minimum premium to keep the policy in force – that is the cost of insurance only.
Potential buyers evaluate how much they might be willing to bid on a policy based upon their own projected internal rates of return (IRR) in light of these and other parameters.  Although somewhat anecdotal, my understanding is that offers will be made on the basis of IRRs from 12 percent to 20 per cent, and higher, after consideration of the fund's total investment (initial purchase price, plus future premiums). And these figures may be net of other transactional costs not within the scope of this discussion.


Integrity Life Solutions, LLC offers a free CPE course with No Strings Attached. Our free CPE course is written per NASBA guidelines which approves us to offer a 100 minute free CPE class. This course is designed to save you time and money while you learn and earn free credits.
This 2 credit free CPE and CFP class introduces an overview to the Life Settlement industry. This free CPE course will explain why it is your fiduciary duty as a CPA and CFP to understand and recognize a viable life settlement and to be able to explain it to your clients.

http://www.freecpe.org/   or  www.integritylifesettlements.net or call 973-275-1110

Integrity Life Settlements is a viatical settlement and life settlement broker, located in the New York area in Maplewood NJ. They negotiate the transaction between the seller and the Buyer. Their expertise is in obtaining the highest possible value for your policy from only reputable financial institutions. Integrity Life Settlements is affiliated with other professionals including attorneys, accountants and actuaries who can provide you with independent financial advice. If you prefer, Integrity Life Settlements will work with any of your trusted financial and legal advisors. In either case, a due-diligence will be performed prior to any transaction.

http://www.freecpe.org/ or www.integritylifesettlements.net or call 973-275-1110