Life Settlement is a retirement planning tool
Life settlements are a new retirement planning tool for older individuals in which a third party, preferably institutionally funded, purchases a senior�s existing life insurance policy for more than its cash surrender value (CSV). Life settlements are especially valuable when used for trustees.
Life settlements can create a larger payout to the insured compared to if policy had been dropped or surrendered. There is no set percentage of face amount paid. The offer is determined by the policy�s premium amount, the type of policy, and the age, health, and life expectancy of the insured.
A life settlement is not a viatical. Viaticals are purchases of policies of the terminally ill with a life expectancy of two years or less. Life expectancy on life settlements can be up to 15 years, depending upon the company purchasing the policy.
When looking at existing life insurance policies, the following situations may be possibilities for life settlements: business succession; trust administration; estate or financial planning; commercial lending; bankruptcy; divorce; charitable giving; and discontinued employee or executive retirement programs.
For example, consider the use of life settlements in the sale of a business in which an otherwise tenuous deal was accepted. The offer to purchase the company fell $1 million short of the desired sale price. The corporation owned $10 million of key person life insurance, and most of the policies were term. The cash surrender on the permanent portion of the policies was $800,000. All policies were submitted for an appraisal, and a life settlement offer of $3.5 million was obtained. With an extra $2.7 million from this source, the company realized they would get more than their original target amount. They accepted the offer to purchase the company.
In another case, a company was sold and its advisor allowed the key person life insurance policy, which was term, to pass to the purchasers of the company as part of the assets. The purchasers of the company were able to sell the policy for a very substantial amount, because they knew about the potential value of life settlements. The advisor�s errors and omissions insurance had to pay the original owner to settle a claim arising from the advisor not obtaining the value of the policy for his client.
A policy carried on the books as �no value� and ready to be dropped may turn out to be worth a great deal in a life settlement. Term policies can be considered and have been purchased. Other types of policies that can be purchased include universal, whole life, variable, and group. Policies can be owned by individuals, trusts, and companies.
When insurance coverage is still needed and a policy is performing poorly or its premiums have become unaffordable, a specific program may be used with a life settlement to replace coverage while getting cash out of the old policy. Consider an 80-year-old woman who sold a $5 million policy. She put $708,000 in the bank after purchasing another $5 million policy with a premium that was guaranteed for 10 years and a guaranteed payout of $5 million at death or the end of the 10 years. She also went from an approximate $150,000 premium on the old policy to a $92,000 premium on the new policy.
Different formulas may be used to determine the value of a policy, depending upon the company making the appraisal. It is possible that one or more companies may not make an offer and other companies may give varying offers. To ensure the best offer for the client, a life settlement broker can take the case to several companies.
There are also creative premium financing programs that require little or no posting of collateral. Other specialty programs include access to funders that will buy long-life expectancies, hard-to-place cases, and entire large face-value policies (many funders have caps).
Ideal institutional funders are world-recognized financial institutions, not self-created companies or trusts that hold investment capital. Institutional funders provide safeguards for advisors and their clients, including institutional escrow agents and policies held in pools, not resold. It is important to know who is holding the policy.
As circumstances change, the ability to obtain cash from the sale of a life insurance policy can be extremely valuable, offering an opportunity for both the advisor and the policyholder.
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