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Life Settlements, A New Option For Seniors
WHAT IS A LIFE SETTLEMENT
A “Life Settlement” is the sale of a life insurance policy giving the policy owner a cash settlement, or immediate lump sum cash payment, in excess of the current cash surrender value. Consumers have long viewed life insurance as a means of receiving immediate cash to pay estate taxes, to protect surviving family members, to purchase assets or to meet other business and personal needs. It is estimated that over 90% of the seniors in the U.S. are not aware of life settlements and the possible additional wealth hidden in their life insurance policies.
TYPES OF SETTLEMENTS, PAST AND PRESENT
The life settlement market grew out of the viatical settlement market that came about in the 1990’s to provide cash to HIV/AIDS patients. The viatical arena received some much-deserved bad publicity, so it is very important to differentiate today’s life settlement business from its viatical predecessors. The early viatical industry too often paired desperate and very ill clients with opportunistic individual investors. Today many things have changed, life settlements sellers are for the most part, experienced investors with little financial pressure, advised by qualified financial professionals. Mostly institutional funders have replaced the individual investor with insurance companies providing risk management services. The result is that today’s life settlements are handled professionally and anonymously. The buyers look at life settlements in the same way they would an annuity, as just another actuarial based product. Pools of policies are normally held in trusts and this will protect the anonymity of the insured and if the need arises to examine the holdings, they will not analyze the individual policy details. Viatical settlements are only for terminal ill individuals and life settlements are for seniors over the age of 65. These products have very different market focus and should be considered as two separate entities.
HOW LARGE IS THE MARKET
According to a December 1999 report by Conning and Co., there is approximately $492 billion dollars of life insurance in effect for people over the age of 65. More than 20% of whole life insurance policies on individuals 65 and older may have a fair market value greater than the cash surrender value! In addition, the 2000 U.S. Census showed about 12 percent, or 35 million Americans will be age 65 or older!
WHO IS A CANDIDATE FOR A LIFE SETTLEMENT
Life insurance is purchased for many reasons; the recurring factor is the need for personal or business protection. Now, what happens if your needs change and the reason you purchased the policy has disappeared? Here are some examples of changing circumstances that could trigger the opportunity for a life settlement transaction:
- Change in estate size
- Change in health condition
- Divorce/Bankruptcy/Retirement
- The need to exchange high annual premiums for monthly income
- Premiums no longer affordable
- Selling a business
- Surrendering a policy or one in danger of lapsing
- Needs funds for alternative investments
- A family trust has eliminated the need for life coverage
Life insurance is a valuable financial-planning tool for many, but if the need for life coverage no longer exists, why would anyone keep paying for the policy?
PLACEMENT PARAMETERS
Generally, when the insured is 65 years or older they may qualify for a “life settlement,” or a lump sum payout. This allows the insured and his or her beneficiary to get immediate cash rather than wait for the death of the insured. The size of the cash payout depends on the age and the health of the insured.
In addition to age, health condition, the premium structure are factors that will determine whether someone qualifies for a life settlement. The following is a limited summary of the placement parameters:
Company Rating - B+ or higher
Face Value Maximum - Unlimited
Face Value Minimum - 100K
Premium Ratio – Less Than 7%
Life Expectancy - Up to 15 years
WHAT IS REQUIRED FOR A POLICY APPRAISAL
The process is simple, in most cases an application and a release form are all that are required. There are no physical exams, tests or application fees. If the policy is deemed to be suitable for a life settlement placement, some other information will be required; The broker with a client who may benefit from a “life settlement” will need to get a copy of the policy and have the insured agree to allow the life settlement company to access his or her medical records. In their “due diligence” the life settlement company will evaluate the insured to arrive at the cash payout for the policy. Overall, it is a straightforward process, depending on the life settlement company you are working with.
Funding companies may be able to help with getting this information, but any of the above information included with the application/release will speed up the process. Most evaluations require 4-8 weeks; sometimes it may take longer to evaluate the insured.
CASE HISTORY # 1
Face Value - $750K U.L. policy
Age - 71 yo male
Health – Emphysema & Diabetes
Cash Value - $125K
Settlement - $185K
Details - Client purchased a paid up indexed annuity with the proceeds
CASE HISTORY # 2
Face Value - $7.5MM U.L. with annual premium of $250K
Age - 79 yo female
Health - History of non-malignant breast cancer
Cash Value - $30K
Settlement - $1.2MM
Details - Purchased $7.5MM current generation life product that was $30K a year less expensive than the original policy
CASE HISTORY # 3
Face Value - $3MM
Age - 73
Health - No major health problems
Cash Value - $100K
Settlement - $350K
Details - Policy was under performing and was going to lapse, instead was able purchase $9MM in standard issue life insurance
WHAT DOES THE FUTURE HOLD
Actuarial data suggests that of the people age 65 and older with life insurance policies currently in force, 40% of these policies will not be kept to maturity. This is a significant untapped market and providers are aggressively looking for policies to purchase. In 2002 the market did almost 2 billion in life settlement transactions. The market is growing and according to Erich Sippel and Co., a life insurance consulting firm, the life settlement market is estimated to grow to $10 to $15 billion during the next three to five years!
Life settlements are virtually unknown today and if you discover you have a senior client with changing needs; the policy should be appraised for its market value. The secondary market for life insurance is here to stay and now is the time to incorporate the life settlement option into your senior client presentations.
For more information contact: Mark Mrky, Life Insurance Settlements Inc. 866-326-5433 or email mark@lisettlements.com
Company Description
Life Settlement through LISI Release
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