Advanced ways to boost your business using life settlements
By Larry Simon
Life Settlement Solutions
Life settlements have become a valuable and common tool for producers looking to help clients get rid of unnecessary life insurance policies. However, producers may not have considered life settlements as a financial planning tool when evaluating more advanced planning strategies.
Much the same as life insurance is applicable to clients with various advanced planning needs, life settlements can be appropriate for these same clients and can apply to some of the more advanced strategies that are utilized with business, estate planning and other strategies, like charitable gifting. When reviewing options with your clients to address their changing financial circumstances, it's important to incorporate life settlements into the process and determine whether under-performing or outdated life insurance policies can be turned into assets that provide a realized source of new revenue.
Situation No. 1: Term conversions
Term policies are commonly perceived to have no cash or settlement value. However, in the life settlement marketplace, term policies -- especially those with conversion options still in effect -- can be evaluated based on the post-conversion value of the converted insurance policy. Many of these cases can become viable settlement cases. For example, seniors in this situation can choose to convert a term policy to a universal life (UL) policy and settle the converted UL policy in the settlement marketplace. To accomplish this, advisors compile information on the post-converted policy and submit it to settlement providers for evaluation. Those providers may then issue pricing offers based on that converted policy. Should the client accept the offer, the term policy is usually converted during the closing process and the client receives proceeds based on the settlement value of the converted insurance policy.
This option allows the insured to access the settlement market using his or her current term life insurance policy and realize the proceeds of the settlement for a variety of purposes, including newer, more appropriate life insurance coverage. Combining term conversions and the life settlement marketplace can also benefit financial professionals, as conducting such transactions can result in increased revenue generated for the advisor's business, including compensation on the life-settlement transaction, the conversion based on target premium and the purchase of new life insurance.
It is important for advisors to verify that their clients can obtain new insurance coverage before transacting a life settlement. If a client's health has deteriorated and the client cannot obtain new insurance or the premiums would be cost prohibitive, then the term conversion (without a life settlement) might be the only viable option for that client to obtain permanent coverage.
Situation No. 2: Restructuring life insurance
Clients' insurance needs change over time due to a number of factors, and policies do not always perform as well as expected; therefore leaving many seniors with escalating premiums causing them to surrender or lapse policies, often for low cash payouts. Financial professionals working with clients in this situation can offer life settlements as a way to get rid of underperforming life insurance and use the proceeds to purchase more appropriate coverage for their current needs.
Situation No. 3: Business insurance
Life settlements can greatly benefit those dealing with business life insurance, as business owners and executives can use the financial transactions as a way to deal with policies that are no longer necessary due to a variety of reasons, including:
- Retirement of a key executive, leaving a business with unneeded key person policies
- Dissolution of partnerships (rendering buy-sell agreements unnecessary)
- Receipt of policies as part of a retirement package by executives who do not wish to keep the policy in force
- Change of business ownership (sale of the business) causing changes in succession plans and reducing/eliminating the need for insurance purchased to fund estate tax liabilities on the value of that business
- Exit strategies for benefit programs, including split-dollar plans allowing executives to retire any debt owed to the firm, purchase additional insurance and create cash reserves
- Proper (market) asset valuation of business owned life insurance (as opposed to simply valuing policies at cash surrender value) when calculating the value of a business for appraisal or sale purposes
Situation No. 4: Charitable giving
Many senior clients have strong affinities with charitable organizations and long histories of involvement with charities. However, some may have wishes to donate that exceed their available cash to do so. Some seniors may be continuing to fund life insurance policies that they no longer need due to a variety of changes in their financial or family structure. In other instances, seniors and charities continue to fund life insurance policies used in some type of charitable gifting strategy that has a deferred benefit to the charity. There may be opportunities to fulfill clients' wishes to make more immediate donations during their lifetimes and charities' needs for immediate funds through settlement of these policies and use of the proceeds to make immediate donations.
Often, seniors do not want to donate their policies to charities and leave their favorite charity with ongoing premiums and administrative obligations. Life settlements can solve this problem by allowing clients to use the proceeds from a life settlement to make a cash donation and protect themselves and the charities from any ongoing premium funding, gifting or administrative requirements. This option also allows clients to see their gifts make a difference during their lifetime, as the charitable organization will be able to use the funds from the life settlement immediately.
Situation No. 5: Split-dollar exit strategy
Life settlements can also be used as an exit strategy for existing split-dollar arrangements where an executive is the insured on multiple policies owned by multiple trusts and the company is owed money for advances. In such instances, the client may settle the policy to: (1) terminate the split-dollar arrangements; (2) eliminate ongoing premium payments; (3) repay the company for the advances; (4) acquire additional life insurance at little/no net cost; and (5) profit from the sale of existing policies.
In the typical split-dollar arrangement, an irrevocable trust and limited liability company (LLC) are formed, and the trust borrows funds from the bank to contribute to the LLC. Once funded, the LLC purchases an immediate annuity, sets aside funds for an additional policy and creates a cash reserve. The income stream from the single payment immediate annuity (SPIA) is used to finance loan interest, life premiums on a new policy, taxes and a cash reserve.
To exit the split-dollar arrangement, the existing life insurance policies are sold into the secondary market and settlement proceeds are used to repay the executive's employer for the split-dollar advances and end the split-dollar arrangements. The remaining balance, if any, is then added to the cash reserve. The SPIA continues to finance premiums on the new insurance policy and loan interest for the bank loan, but the client no longer funds premiums to the trusts for the policies transacted in the settlement market. Ultimately, the death benefit of the new insurance policy repays the bank loan. In summary, additional "net" insurance is obtained by the client, the split-dollar arrangement is terminated and the employer is repaid for spilt-dollar advances by settlement proceeds and an increased cash reserve is created.
Whether it means entering the life settlements marketplace for the first time or expanding your existing life settlements practice to include these advanced strategies, taking the next step will help producers grow businesses and increase revenues while providing an excellent service to clients.
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