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What is a Life Settlement?
A life settlement is the sale of an insurance policy by a senior citizen to a third party institutional buyer. Any senior citizen 65 and older with an inforce insurance policy with a death benefit of over $250,000 is eligible for a life settlement transaction. Senior citizens with unwanted or unneeded life insurance no longer have only two options, take the cash surrender value out of the policy or let it lapse. Seniors can now sell the ownership and beneficial interest in the policy for a cash lump sum that is greater than the cash surrender value.
There are many reasons that insurance policies are no longer needed. The policy can become cost prohibitive, the original need for the coverage could be gone or the policy could be term and it is about to lapse. Whatever the reason, life settlements are quickly becoming the most non-invasive and consumer friendly insurance option available. Recently, a male in average health age 75 had a $5,000,000 insurance policy that he bought to protect his wife and children in the event of his untimely death decided that he no longer needed or wanted the policy. The policy had a cash value of $250,000. Instead of taking the $250,000 from the insurance carrier, the insured sold the policy for over $1,400,000 or close to 30% of the face value.
This insured was able to obtain this offer from an institutional buyer by using the arbitrage that is created between the cost of the insurance to maturity and the insured’s life expectancy. By using the insured medical records and standard mortality tables, S & P rated actuaries obtain a life expectancy. The institutional buyers use these life expectancies and an illustration from the insurance carrier that demonstrates the premiums for the policy to maturity to make purchase offers to the client.
If the client accepts the offer, they will sign documents that transfer beneficial rights and ownership of the policy to the buyer. Once those changes are made, they buyer has 3 days to pay the full purchase price. The new owner will continue to pay the premiums and collect the death benefit at policy maturity. Up to the amount of premiums paid since the policy was issued the money received from the sale of an insurance policy is tax free.
Senior Citizens that have term policies that are about to end or policies that they want to keep can re-finance their policy by selling their existing contract and using the money received from this purchase to “dump in” to the new policy and lower the annual premiums.
Insurance agents and financial advisors have a fiduciary responsibility to discuss life settlements with their senior clientele for both possible sale and re-finance. All senior citizens should make shore that their agents and brokers are using licensed life settlement brokers. These brokers work with all institutional investors in the market place to maximize the offer to the client. |
Life Insurance Settlements
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This intel was contributed by Dave
Dave
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May, 2012
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