Life Settlements

What is a Life Settlement?

A life settlement, simply put, is when a policy owner who has an unneeded or unwanted life insurance policy sells the policy to a third party investor for more than the cash value offered by the life insurance company. The entity that buys the policy becomes the beneficiary of the policy's death benefit as long as they continue to make the remaining premium payments.

Life settlements have created a wonderful alternative for Seniors in that the secondary market for life insurance now allows policy owners to get fair market value for their policies, rather than letting the policy lapse or accepting the lower cash surrender value from the issuing life insurance company.

Generally speaking, a life settlement is an option for policy owners age 65 and older. More and more policy owners are becoming familiar with life settlements and are seeking the advice of financial professionals to help them decide if a life settlement is right for them. In fact, a large number of experts now believe that informing clients about the benefits of life settlements should fall under the fiduciary duty of a financial advisor.

Is it Legal?

The Policy as Transferable Property

The Supreme Court case of Grigsby v. Russell (1911) gave policy owner’s the right to transfer an insurance policy. Justice Oliver Wendell Holmes noted in his opinion that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner could transfer without limitation. Wrote Holmes, “Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving.” This opinion placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as stocks and bonds. As with these other types of property, a life insurance policy could be transferred to another person at the discretion of the policy owner.

It was determined that a life insurance policy is transferable property that contains specific legal rights, including the right to:

• Name the policy beneficiary
• Change the beneficiary designation (unless subject to restrictions)
• Assign the policy as collateral for a loan
• Borrow against the policy
• Sell the policy to another party
• A second milestone occurred in 2001 when The National Association of Insurance Commissioners (NAIC) took a crucial step by releasing the Viatical Settlements Model Act defining guidelines for avoiding fraud and ensuring sound business practices.

When Should a Life Settlement Be Considered?

• When the policy no longer needed
• When the premiums are too expensive
• Investment projections have not materialized
• To fund medical/long term care
• For charitable/family gifting
• When employment status changes
• For business Uses: Key man, split-dollar, or buy-sell agreements
• For an Irrevocable life insurance trusts (ILIT)
• Bankruptcy

Premium Finance

Premium Financing the lending of funds to a person or company to cover the cost of an insurance premium. Premium finance loans are often provided by third party finance entity known as a "Premium Financing Company"; however insurance companies and brokerages occasionally provide premium financing services.

To finance a premium, the individual or company requesting insurance must sign a premium finance agreement with the premium finance company. This is a loan contract that lasts for the life of the insurance coverage.

Benefits of Premium Financed Life Insurance

• It eliminates the requirement for a large up-front payment to an insurance company.
• It allows multiple insurance policies to be attached to a single premium finance contract, allowing for a single payment plan to cover all insurance coverage.
• Premium financing can be transparent to the insured. Brokers transmit the completed premium finance agreement to the premium finance company, and the policy holder is billed as they would be for any other typical insurance policy.

Furthermore, life insurance can be a wonderful vehicle for estate planning, income replacement, cash accumulation and wealth transfer scenarios. Many policy owners choose temporary and permanent premium loan products to satisfy their life insurance planning needs. It is most commonly used for affluent policy owners who wish to leverage their cash flow into other assets, instead of making expensive or inconvenient to self-fund premium payments. For these individuals and others like them, premium financing is an excellent resource and a financially savvy alternative to paying premium out of pocket. As both a life insurance settlement and premium finance broker, we can help producers and policy owners create a smart and efficient life insurance plan that is catered to their particular needs.

Financial Advisors

A Life settlement can be an intricate financial solution in which you are encouraged to seek the advice and guidance of an experienced professional advisors. The following is a list of advisors that you may want to consult with regarding your life settlement options.

• Accountants/CPAs
• Attorneys
• Certified Senior Advisors/CSAs
• Charitable Trust Officers
• Estate Planners/CEPs
• Financial Planners/CFPs
• Insurance Advisors

Providers

A Life settlement provider is the party in the transaction that actually purchases the life insurance policy. The provider is responsible for paying the policy holder a cash sum greater than the policy's cash surrender value. There are less than 100 providers, mostly backed by institutional investors, who fund almost all of the life settlement sales. These large institutional providers package the seller's policy into a confidential portfolio asset.

Life Settlement are required to be licensed in the state where the policy owner lives. Approximately 41 states are considered regulated states regarding the sale of life insurance policies to third parties.

Brokers

A life settlement case can be submitted directly to a settlement provider or you or your financial advisor may choose to work with a life settlement broker. Life settlement brokers are experienced middlemen who work to bring together individual policy sellers with providers who are looking to purchase that particular type of paper. Brokers, earn a commission in exchange for their expertise in presenting a policy to multiple providers, just like a real estate agent seeks multiple offers when a homeowner is trying to sell their house. Not all providers are the same, so a life settlement broker will use his expertise and connections to ensure that policy is being presented to prescreened providers who will present fair offers and close the transaction quickly without problems. In order to achieve the highest possible price for your policy it is recommended that you consult an experienced life settlement broker.

It is the broker's obligation to seek bids from multiple providers. It is the advisor responsibility to help the client evaluate the offers price, terms and net yield after commissions.

Broker compensation may vary significantly and should be fully disclosed and discussed with the guidance of an advisor to ensure that the transaction will truly benefit the client. In most states, brokers are required to be licensed to do business in that state. It is very important for a client to work with a licensed broker who has the experience to deal with sophisticated institutional buyers in order to achieve the highest possible price for the client.

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.

Basic Steps in a Life Settlement Transaction

• The first step is for the Policy owner to consults with an advisor and to decide if a life settlement is a good financial solution.
• Next, the policy owner and advisor will choose a broker or provider with whom to work with.
• After that, the client and advisor submit the policy for valuation and the client releases their medical information using a HIPAA form.
• Following that, if policy meets certain criteria and qualifies for a life settlement, the providers will submit offers directly or through the broker.
• Next, the client and their advisor will review the offers and client accepts the best offer.
• The next step is for the client and their advisor to complete the provider's closing package, and return a number of required documents.
• Once that is done the provider wires the payment into an escrow account and submits the change of ownership forms to the insurance carrier.
• Finally, all of the paperwork is verified and funds are released to the policy seller.