Life settlements represent one of the most important financial innovations of the past 30 years. By recognizing the fundamental right of policyowners to assign their policies, life settlements have created a more competitive life insurance market where consumers enjoy new options and greater value every day. To learn more about what this powerful transaction means to your business, read on.
It has never been more important for advisors to understand the potential value of your assets and what opportunities are available. Life settlements represent a powerful tool for helping our clients understand the market value of their policies; optimizing their life insurance; and suggest more efficient investment opportunities.
ONE TRANSACTION. MULTIPLE APPLICATIONS.
A life settlement is an opportunity for a policyowner to sell an unneeded life insurance policy for more than the policy’s cash surrender value and less than its face value. But life settlements can represent much more than an exit strategy for unneeded life insurance policies. With our assistance, a life settlement can be a springboard to achieving the policyowner’s broader financial objectives, as the following examples illustrate.
Recouping term premiums – a policyowner who no longer needs a term policy can use a life settlement to eliminate future premiums and recoup a portion of their overall premium outlay.
INSURED Male age 72 FACE AMOUNT $1,500,000
POLICY Term CASH VALUE $0
Coventry provided the policyowner with $20,000. The policyowner, a single father, took out a term policy years ago to provide income protection for his daughter. Once his daughter was married, he no longer needed the coverage and was planning to lapse the policy. Coventry First provided the policyowner with $20,000, where he otherwise would have received nothing.
Restructuring cash flow – a policyowner with limited cash flow can use the proceeds from a life settlement to fund immediate needs while eliminating future premium payments.
INSURED Male age 80 FACE AMOUNT $500,000
POLICY Universal Life CASH VALUE $28,356
Coventry provided the policyowner with $110,000. The policyowner purchased a life insurance policy to provide protection for his family. Since his children were now grown with families of their own and he maintained additional coverage, the need for these policies no longer existed. Coventry First provided the policyowner with $110,000, which he used to supplement his retirement and plan a family vacation.
Retained death benefit – a policyowner can choose to retain a portion of the coverage while eliminating future premium obligations. The result is a revolutionary shift in how life insurance assets are managed. Instead of accepting the life insurers’ nonforfeiture options clients’ policies are reviewed to explore their market value.
INSURED Male age 70 FACE AMOUNT $1,080,676
POLICY Whole Life CASH VALUE $0
Coventry provided the policyowner with $150,000 and a $50,000 retained death benefit.
A successful business owner took out three policies to provide income protection for his wife. After deciding to pass the business down to his son, there was an unfortunate falling out within the family. The policyowner and his wife were left with no income and could no longer afford to keep the policies in force.
With the Retained Death Benefit option, Coventry First provided the policyowner with $150,000 in cash and a $50,000 death benefit with no future premium obligations.
INSURED Female age 53 FACE AMOUNT $1,000,000
POLICY Term CASH VALUE $0
Coventry provided the policyowner with $81,500. The policyowner took out a term policy to provide security for her daughter. After being diagnosed with a serious illness, she wanted to spend more time with her daughter and needed some help covering her medical expenses. Coventry First provided the policyowner with $81,500, where she otherwise would have received nothing. She used the proceeds to cover her expenses
and enjoy time with her family. The information provided by these valuations can help policyowners use their capital more efficiently.
Life settlement candidates are insureds age 65 and over with:
- a life insurance policy face amount of at least $100,000; and
- a life expectancy up to 20 years.
Common scenarios leading to a life settlement include any number of situations in which a policy is no longer meeting the policyowner’s needs, such as:
- the insured has outlived the need for the policy;
- a change to the overall financial plan;
- the end of the term conversion period is approaching;
- an increase in premiums due to a rising cost of insurance;
- a business partnership has dissolved;
- a key employee has retired and the coverage is no longer needed;
- “vanishing” premiums have not vanished;
- the owner wants to move the policy’s market value into another
- asset or buy a more efficient insurance policy;
- reduction in the value of an estate or business;
- retirement or sale of a business; or
- a change in marital status.
The life settlement process begins with a valuation system to determine if an offer can be made. Here is how the process generally works. A completed questionnaire and authorization are submitted, along with carrier illustrations and the insured’s medical records for the last five years. Experts evaluate the policy to determine if an offer can be made. And then makes the offer to the owner.
Once an offer is accepted, the company issues closing documents. After they receive the completed closing documents, the change of ownership and beneficiary forms are sent to the life insurance company. Upon confirmation that the change forms have been processed by the carrier, funds are released to the seller.
ESTABLISHING BEST PRACTICES
Secondary market transactions are funded with institutional capital. Not only does institutional backing provide a secure funding source, it also provides a higher degree of consumer protection with regard to privacy and confidentiality.
Clients should demonstrate a strong track record of successfully completing transactions smoothly and efficiently. The sale of a life insurance policy may be a taxable event. Sellers of life insurance policies should seek advice from their tax advisor based on their own particular circumstances.
POWER TO THE POLICYOWNER®
Life settlements have changed the way we think about life insurance. For policyowners, life settlements have unlocked the market value of life insurance, transforming unneeded policies into assets with significant value.
Life settlements represent a valuable financial solution to the various needs of families and businesses.
Over time, life insurance needs change. Loans are repaid; key executives retire; estates become smaller; businesses are sold; estate tax liabilities are reduced; level term premiums come to an end. Or, with interest rates down, a policy may be too expensive to maintain.
By enabling policyowners to access the market value of their policies instead of surrendering them back to the insurance company, life settlements can create enormous opportunities for policyowners and advisors alike.
ABOUT OUR PARTNER COMPANY
They created the secondary market for life insurance and established a new class of consumer-driven secondary market transactions. By uniquely bridging insurance and capital markets, they have opened a wealth of opportunities for policyowners and the financial professionals who serve them. Their efforts have delivered more than $3.5 billion to policyowners.
As the market leader, they continue to drive the industry forward. By expanding opportunities and setting new standards of excellence in everything they do, they are making life insurance more flexible, more powerful and more valuable. And it will never be the same.
To learn more about life settlements and other new options available through the secondary market for life insurance, call Insurance Shops 215-613-4999