Help improve this article by adding relevant internal links (August 2008)This article does not cite any references or sources Please help improve this article by adding citations to reliable sources Unverifiable material may be challenged and removed A life settlement is a financial transaction in which a policy owner possessing an unneeded or unwanted life insurance policy sells the policy to a third party for more than the cash surrender value (cash value offered by the life insurance company) The purchaser becomes the new beneficiary of the policy at maturation and is responsible for all subsequent premium payments Life settlements are an important development in that they have opened a secondary market for life insurance in which policy owners can access fair market value for their policies, rather than accepting the lower cash surrender value from the issuing life insurance company Generally speaking, life settlements are an option for high-net-worth policy owners age 65 or older Independent estimates report that among this group, 20% of policies have a market value that exceeds the cash value offered by the carrier And while many policyowners are unfamiliar with life settlements until a financial professional mentions the option to them, the concept has gained attention from high-profile proponents such as Warren Buffett, former U A growing number of experts now believe that informing clients about offering life settlements should fall under the fiduciary duty of a financial adviser In a life settlement transaction, there is a chain leading from the seller of the policy to the end buyer of the policy (known as a life settlement provider) Each link in the chain has a different responsibility in facilitating the transaction and ensuring that it runs smoothly, while outside vendors typically assist the provider with specialized functions The typical criteria to be an eligible candidate for a life settlement would include: • Policy holders age 65 and older (ages as low as 55 are possible) • $50,000 minimum face amount • Policy active minimum of two years • Low cash surrender value • Premiums less than 8% per annum • Insurance Policy Types o Universal Life o Term (if convertible) o Whole Life o Variable Life o Survivorship (any type) o Adjustable Life o Joint First to Die The proceeds from a Life Settlement transaction can be taxable Typically, the taxable proceeds are based on the difference between the cost basis of a policy (the money paid in) and the cash “surrender” value and the final settlement amount received by the policy holder as to what is considered taxable Any tax implications for capital gains realized from such a transaction could be offset by tax deductions based on “the entire cost of maintenance in a nursing home or home for the aged” (sec In the case of a viatical settlement where the policy owner has a terminal diagnosis and life expectancy of 24 months or less, the proceeds are tax free etiring “key-man” or selling a company/partnership 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/CPAsAttorneysFinancial Planners/CFPs/ChFCs/CFCsWealth ManagersInsurance AdvisorsEstate Planners/CEPsCertified Senior Advisors/CSAsCharitable Trust Officers 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 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 Industry experts state: "It is imperative that the client works with a licensed broker who has the experience to deal with sophisticated institutional buyers to yield the highest price 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 A licensed life settlement broker can help you meet all relevant requirements 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 There are four major life expectancy providers, namely AVS, Fasano Associates, 21st Services, and EMSI Some underwriters provide unreasonably short life expectancies by using base tables that are 5 years out of date, ignoring future mortality improvements & current treatments Eg Statins and basing life expectancies on life manuals which are conservative for mortality and not longevity risk Others apply actuarial analysis to the most recent available data as well as their own experience to develop their base tables and underwriting manuals Providers who do not provide short life expectancies are shunned by originators whom are primarily remunerated for volume Providing more reasonable life expectancies does not inflate the apparent value in these insurance policies This results in fewer cases being written and less support from originators Fasano Associates has published two experience studies showing 96% Actual to Expected accuracy One was performed by Milliman and the second by the Institute for Actuarial Studies No other experience studies have been made publicly available Tracking agents use a variety of methods to collect this type of information such as phone, email, mail, and the social security database Most tracking agents also provide premium management, death claim processing (collecting the death benefit from the insurance company once the insured has expired) and reporting services Steps in a transactionPolicyowner consults with an advisor, decides to sell his or her policy Policy owner and advisor decide whether to work with broker or to go directly to providers Client & advisor submit policy for valuation If policy meets criteria for a life settlement, providers send offers directly or through a broker Client and advisor review offers and client accepts his preferred offer Client and advisor complete the provider's closing package, and return essential documents Provider places cash payment in escrow and submits change of ownership forms to the insurance carrier Paperwork is verified and funds are transferred to the policy seller Although the secondary market for life insurance is relatively new, the market was more than 100 years in the making The life settlement market would not have originated without a number of events, judicial rulings, and key individuals Click Here For More Information Hyperlink Text
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