When you sit with your clients to review their options and address their changing financial circumstances, it's important to remember that a life settlement can turn a no-longer-needed or under-performing life insurance asset into a realized source of revenue.
Life settlements are financial transactions where life insurance policies are sold in the secondary market to a third-party purchaser. Such transactions can result in cash payments that are higher than the cash surrender values on the policy. Once a life settlement is conducted, the client relinquishes all rights to the policy, while the purchaser becomes the new owner and is therefore responsible for all premium payments until the death of the insured. Upon the death of the insured, the purchaser collects the policy's death benefit.
While life settlements have proved beneficial for many senior clients, they are not for everyone. Life settlements are designed for clients that meet certain age requirements and who are free from catastrophic or life-threatening diseases. Requirements vary throughout the industry, but life-settlement candidates and their insurance policies generally must comply with the following eligibility requirements:
- Candidates should have $50,000 or more in face value of life insurance coverage, typically universal life.
- The policy should be beyond any carrier or statutory contestability period and in force, subject only to the payment of premiums.
- Term policies are usually eligible if they are convertible or if they have a minimum term-life insurance coverage equal to the greater of two times the life expectancy or 10 years.
- The insured's life expectancy is typically between 25 and 169 months, based on the conclusions of a medical life expectancy provider, with no chronic or catastrophic conditions or terminal illnesses identified.
While there are many reasons to use life settlements, including to effect split-dollar exit strategies and for business purposes, below are a few fundamental case studies to help better illustrate the benefits of a life settlement transaction in certain circumstances.
Case study No. 1
A 75-year-old client has a $2 million policy that he purchased five years ago. Following changes in the estate tax laws, the insured no longer needs as much coverage and does not wish to continue to pay the $60,000 annual premium on the policy. He is told the cash-surrender value on the policy is $50,000, but if he were to sell the policy in the secondary market, he would receive $460,000. The client no longer needs the policy and wishes to donate it to a charity of his choosing. However, the charity does not wish (and cannot afford to) take on the ongoing premium payments associated with the life-insurance policy. Since the client is unable to donate the policy directly, he decides to take advantage of the higher sale value in the secondary market and donate the proceeds generated from the sale of the policy to the charity. In this case, the client would receive $410,000 more by conducting a life settlement then by tendering the policy back to the issuing carrier and receiving the cash surrender value, making the life settlement transaction the more attractive alternative.
Case study No. 2
A 79-year-old female client currently owns a $1.8 million policy that was purchased 10 years ago. Due to changes in her financial situation, her current policy now exceeds her coverage needs and she wishes to purchase a new, more appropriate life insurance policy. After evaluation, it is determined she could sell the policy in the secondary market for $500,000, which is $350,000 more than the cash surrender value on the policy. The client has additional insurance capacity and decides to pursue a life settlement transaction and is able to purchase a new life insurance policy with the acquired money that better meets her needs.
Case study No. 3
An 85-year-old client currently has a $1.75 million universal life policy that he purchased 10 years ago. Following a number of changes in his financial condition, the policy no longer meets his needs. After analysis, it is determined the cash surrender amount on the policy is $140,700. The client decides to be evaluated for a life settlement and learns that he can sell his policy in the secondary market for $670,000 -- $529,300 more than the cash value on the policy. In addition to no longer needing the policy, the client has always been interested in charitable giving, but has never had the available liquid funds to do so. By conducting a life settlement, the client will have access to a significant amount of money, which can then be donated to charity. In this situation, conducting a life settlement may be the better option, as the client no longer needs his policy and will be able to donate without using his other assets.
Case study No. 4
A client is 83 years old and currently owns a $5 million universal life insurance policy that was purchased eight years ago. After an analysis of the client's financial status, it is determined that she no longer needs her insurance policy, since her expected tax liability has declined substantially. Additionally, premiums on her policy have escalated because of underperformance. After evaluation, she is told the cash surrender value of the policy is $37,100, but that if she sold the policy in the secondary market, she would receive a payment of $302,000. The client no longer needs the policy coverage and would like to donate to a charitable organization. After contacting the charity, the client learns that the organization is unable to take on the administrative obligations and premium payments required on a donated policy. In this case, a life settlement transaction may be more appropriate, as the client no longer needs her policy and is able to realize a higher value for the policy after settlement than by surrendering the policy to the issuing carrier.
For information on more advanced life settlement uses, review my article "Advanced Ways to Boost Your Business Using Life Settlements
*Note: Nothing herein should be construed as a solicitation to buy or sell any securities, and neither Life Settlement Solutions nor its respective affiliates provides legal, accounting or tax advice. Nothing contained herein constitutes a recommendation to buy, sell or hold a life settlement, portfolio of life settlements, or any other asset or security.
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