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By Larry Simon
For financial professionals working with high-net-worth seniors, life settlements can offer a beneficial financial beneficial financial planning tool for helping clients deal with underperforming or unnecessary life insurance policies.
Life settlements can be a means of increasing business practices and clientele, while providing senior clients with another important financial option for life insurance policies. And although many financial professionals are aware of life settlements, some have yet to enter the growing marketplace due to their lack of education about the transactions or unanswered questions about how to get involved. On the other hand, some professionals have already begun working with these transactions, benefiting both their practices and their clients. So if you're new to the concept, understanding the basics of the secondary market for life insurance is the best way to begin working with life settlement transactions.
What is a life settlement?
Life settlements are financial transactions where an existing life insurance policy is sold into the secondary market for an immediate cash payment that typically exceeds the cash-surrender value of the policy, but is less than the policy's face value. In such transactions, seniors who have unnecessary life insurance policies can opt to sell their coverage, giving up all policy ownership and rights to a third-party institutional investor. The investor -- who then makes all premium payments on the policy -- becomes the sole owner and receives all policy benefits upon the death of the insured. Such transactions present senior clients with a viable exit strategy for their life insurance policies, and also offer financial professionals a way to present clients with another financial planning option.
Industry background and growth
The life settlement industry stems from the concept of viatical settlements, which were introduced in the 1980s following the beginning of the AIDS epidemic. Life settlements were then established in the mid-1990s, and while similar in some respects, life settlements differ from viaticals in both the individuals these transactions target and the capital used to purchase the policies. Life settlements target and benefit senior clients who are free of life-threatening diseases and illnesses and also meet a number of eligibility criteria, including a life expectancy that exceeds two years in most states. Furthermore, unlike the viatical industry, which typically relied on private investors, the life settlement industry uses solely institutional capital to purchase policies.
Today, the growth associated with life settlements has brought more interest to the marketplace, as well as better regulatory guidelines and involvement from financial professionals from numerous segments of the life insurance industry. The market has already escalated from $5 billion transacted in 2004 to $10 billion transacted in 2005 and according to a May 2006 Bernstein Research report titled, "Life Insurance -- Life Settlement Update -- What A Difference a Year Can Make," the life settlement marketplace is expected to grow to an estimated $160 billion in industry potential in the coming years. These estimates -- which surpass original projections -- further underscore the importance of life settlements as an aspect of the insurance industry, as well as the existing opportunities for financial professionals who are interested in becoming involved with this product.
Eligibility and benefits
Life settlement transactions can be appropriate for seniors facing a number of financial situations such as a change in financial situation, family and lifestyle changes, the need for new investment options, estate tax liability changes, charitable giving, business ownership structures or succession plans changes. While life settlements can be a great financial planning opportunity, it's important to remember the transactions are not appropriate for everyone.
Life settlement transactions should only be considered after an in-depth analysis of a client's current financial situation and insurance coverage. The following eligibility guidelines can help financial professionals determine which clients should potentially consider a life settlement:
Ways to learn more
Financial professionals can use life settlements to further fulfill fiduciary responsibility to clients while taking the opportunity to get involved with a quickly growing segment of the life insurance industry. Those who are interested in entering the marketplace or learning more about these transactions, including information about how seniors benefit or simply how to get involved, can visit industry organizations Web sites such as the Life Insurance Settlement Association (www.thevoiceoftheindustry.com) and the National Conference of Insurance Legislators (www.ncoil.com). A number of resources and marketing tips can also be found by visiting the Life Settlement Awareness Month(TM) Web site at www.lifesettlmentawarenessmonth.com. These sites will give professionals a good introduction to the industry, as well as providing updated information about ongoing regulatory matters and issues currently affecting the secondary market for life insurance.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.
Life settlements can be a means of increasing business practices and clientele, while providing senior clients with another important financial option for life insurance policies. And although many financial professionals are aware of life settlements, some have yet to enter the growing marketplace due to their lack of education about the transactions or unanswered questions about how to get involved. On the other hand, some professionals have already begun working with these transactions, benefiting both their practices and their clients. So if you're new to the concept, understanding the basics of the secondary market for life insurance is the best way to begin working with life settlement transactions.
What is a life settlement?
Life settlements are financial transactions where an existing life insurance policy is sold into the secondary market for an immediate cash payment that typically exceeds the cash-surrender value of the policy, but is less than the policy's face value. In such transactions, seniors who have unnecessary life insurance policies can opt to sell their coverage, giving up all policy ownership and rights to a third-party institutional investor. The investor -- who then makes all premium payments on the policy -- becomes the sole owner and receives all policy benefits upon the death of the insured. Such transactions present senior clients with a viable exit strategy for their life insurance policies, and also offer financial professionals a way to present clients with another financial planning option.
Industry background and growth
The life settlement industry stems from the concept of viatical settlements, which were introduced in the 1980s following the beginning of the AIDS epidemic. Life settlements were then established in the mid-1990s, and while similar in some respects, life settlements differ from viaticals in both the individuals these transactions target and the capital used to purchase the policies. Life settlements target and benefit senior clients who are free of life-threatening diseases and illnesses and also meet a number of eligibility criteria, including a life expectancy that exceeds two years in most states. Furthermore, unlike the viatical industry, which typically relied on private investors, the life settlement industry uses solely institutional capital to purchase policies.
Today, the growth associated with life settlements has brought more interest to the marketplace, as well as better regulatory guidelines and involvement from financial professionals from numerous segments of the life insurance industry. The market has already escalated from $5 billion transacted in 2004 to $10 billion transacted in 2005 and according to a May 2006 Bernstein Research report titled, "Life Insurance -- Life Settlement Update -- What A Difference a Year Can Make," the life settlement marketplace is expected to grow to an estimated $160 billion in industry potential in the coming years. These estimates -- which surpass original projections -- further underscore the importance of life settlements as an aspect of the insurance industry, as well as the existing opportunities for financial professionals who are interested in becoming involved with this product.
Eligibility and benefits
Life settlement transactions can be appropriate for seniors facing a number of financial situations such as a change in financial situation, family and lifestyle changes, the need for new investment options, estate tax liability changes, charitable giving, business ownership structures or succession plans changes. While life settlements can be a great financial planning opportunity, it's important to remember the transactions are not appropriate for everyone.
Life settlement transactions should only be considered after an in-depth analysis of a client's current financial situation and insurance coverage. The following eligibility guidelines can help financial professionals determine which clients should potentially consider a life settlement:
- Minimum age is typically 65 or older
- Seniors cannot have any terminal illnesses or chronic or catastrophic diseases
- Policies must be beyond the contestability period
- Life expectancy must be greater than two years
- Policy must be issued from a carrier with a rating of BB or better
- Minimum policy face values are usually $250,000; however, some smaller policy providers have entered the market during the past year, expanding buying capabilities to policies with face amounts as low as $50,000
- Most types of life insurance policies can be transacted and include universal, term, survivorship and whole life insurance.
Ways to learn more
Financial professionals can use life settlements to further fulfill fiduciary responsibility to clients while taking the opportunity to get involved with a quickly growing segment of the life insurance industry. Those who are interested in entering the marketplace or learning more about these transactions, including information about how seniors benefit or simply how to get involved, can visit industry organizations Web sites such as the Life Insurance Settlement Association (www.thevoiceoftheindustry.com) and the National Conference of Insurance Legislators (www.ncoil.com). A number of resources and marketing tips can also be found by visiting the Life Settlement Awareness Month(TM) Web site at www.lifesettlmentawarenessmonth.com. These sites will give professionals a good introduction to the industry, as well as providing updated information about ongoing regulatory matters and issues currently affecting the secondary market for life insurance.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.
