LIFE SETTLEMENTS AND THE EMERGENCE OF THE SECONDARY MARKET
A Life Settlement
is a sale of a life insurance policy where the insured is 65 years
of age or older and does not have a terminal or chronic
illness. In a life settlement transaction, the owner of the policy
always receives more for the policy than the issuing insurance company
will pay for the surrender of the policy.
The Supreme Court decision
Grigsby v. Russell, 222 U.S. 149 (1911) established that
life insurance policies could be sold. Most life
settlement transactions do not involve transfer of policy ownership
to an individual
with an insurable interest in the life or death of the insured,
but neither regulation nor public policy requires one.
This
ruling is the foundation for the secondary market for life
insurance policies
which Conning Research & Consulting estimates purchased
$5.5 billion in face amount in 2005.(1)
1
Conning Research & Consulting, Inc., “Life Settlements – The
Concept Catches On”, 2006.
Life settlement
opportunities
Life settlement parameters
The transaction process
Tax implications
Life Settlement Opportunities
Review
all insureds 65 and older
• Who
are requesting a term policy replacement
• Who
have outlived their beneficiaries
• Who
are considering a 1035 exchange
• Who
can no longer afford premiums
• Who
are planning to surrender or lapse a policy
• Whose
tax needs/liability have changed
• Whose
health status has changed since policy issue
• Who
are retiring key-executives or a business owner selling or
company/partnership
• Who
are policy owners going through a bankruptcy
• Who
are considering donating a policy to charity
Life Settlement
Parameters
Clients age 65+
• $200,000 minimum face amount
• Life expectancy of 15 years or less (due
to age, health or a combination of the two)
• Low cash surrender value
(below 30% of face amount)
• Minimum loans (below 30%
of face amount)
• Low premiums (below 4% of
face amount)
• Ownership
can be through an individual, a corporation or a trust
The Transaction
Process
Step
1: Client completes and signs application with advisor. Also
signs HIPAA Authorization Form and authorization to request current
in-force illustration from carrier. Client provides a copy of the policy.
Step
2: Weeks 1 to 2 Upon receipt of the three required
forms, Chesapeake Financial Settlements, LLC (CFS) will order current
medical
records
from attending physicians and/or hospitals along with in-force policy illustration.
Step 3: Weeks 3-6
• Upon receiving medical records, CFS will evaluate
these records and estimate the policy insured(s) life expectancy. With this data,
CFS will provide the policy owner with an estimate of the policy's secondary
market
value. In event that this is attractive to the policy owner, CFS will forward
complete policy appraisal package to multiple settlement provider companies.
• Providers will independently forward medical records to their respective
vendors that calculate life expectancies.
• Upon receiving life
expectancy calculations, providers will underwrite
the client’s policy to see if it meets
its funding source's criteria.
• Providers make offers for the policy.
Step 4: Weeks 7
• CFS manages the bidding
process to obtain the highest offer.
• Upon acceptance of the highest offer by the client, CFS will request
contracts from the provider.
Step 5: Week 8
• Advisor and client gather to complete closing documents.
• Completed documents are forwarded to CFS for review and shipment to
provider.
Step 6: Week 9-10
• Provider reviews
closing documents.
• Provider sends change
of ownership documents to carrier.
• Upon receiving verification
from carrier on change of ownership, funds are
released to client from escrow with in 72
hours.
• Client has 15-day rescission period in most states.
Tax Implications
Although
the Internal Revenue Service (IRS) does not have code that specifically
addresses life settlements, it
is a generally accepted
opinion that a life settlement transaction will
be taxed in the following manner. Tax obligations may vary.
When
considering this or any financial strategy, Chesapeake Financial
Settlements, LLC suggests you consult your tax
professional.
The scenario below
is based on a policy with a face value of $1,000,000.
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