Capital Trusts, Inc.

Life Settlements Services

1. Perspectives & Process
2. What is a Life Settlement?
3. What is Life Settlement Brokerage?
4. Who is Qualified for a Life Settlement?
5. What is Needed for a Life Settlement?
6. How Does the Life Settlement Process Work?
7. Taxes
8. Confidentiality
9. Considerations
10. Conclusion

 

Perspectives & Process

The still evolving secondary market for life insurance policies is changing many financial perspectives for many elderly people by providing heretofore unavailable options for senior citizens holding unwanted, unneeded or unaffordable life insurance policies. And it also means completely new responsibilities for their estate planning professionals.

Many estate planning attorneys are still rather vague about the emerging life settlement market - and its implications and its opportunities for their clients. The term life settlement is a bit unnerving to some because they don't really know what it means. Even though life insurance policies have been openly sold in England and other European countries since the latter part of the 19th century, the life settlement market in this country seems to be fraught with misconceptions.

Most people have long viewed life insurance merely as a means of providing liquidity to pay estate taxes, to protect surviving family members, to fund buy/sell agreements or to meet other financial needs. From this narrow view it is no wonder so many estate planning attorneys, bank trust officers and CPA's fall into the trap of agreeing to allow unneeded policies to lapse or be surrendered for just their cash values. This is especially true if the coverage is no longer necessary and/or the premiums have become a financial burden

How many of these policy holders are aware that they can very likely sell their life insurance policy for an amount significantly greater than the cash surrender value?

Estate planning attorneys may today find significant assets for their clients by liquidating a non-performing asset - a now dormant and dysfunctional life insurance policy - with a life settlement instead of merely seeking a cash surrender from the insurance company - or worse, just allowing the policy to lapse. They just have to know how and where to look for help.

 

What is a Life Settlement?

A life settlement, or senior settlement, is the sale of an unwanted or unneeded life insurance policy (whole life, term, universal life, etc.) covering the life of one or more individuals with an "ascertainable and limited" life expectancy. The policy owner is paid a lump sum of cash in exchange for transferring ownership of the policy to a third party institutional investor/purchaser.

A life settlement offers your senior citizen clients the opportunity to receive a portion of their life insurance policy's death benefit which substantially exceeds the cash surrender value while they are still alive. In effect, they can become the beneficiary of their own policy.

Most of the relative few attorneys who have facilitated life settlements for their clients have only dealt with a single funder who had led them to believe that they were the only game in town. Nothing could be further from the truth. There are now more than thirty institutional funders in this relatively young marketplace. A funder may have the best price for a particular life settlement application one month and the next month not even be competitive with the other life settlement funders for a similar application package.

 

What is Life Settlement Brokerage?

The secondary market for life settlements is fairly new - and it is continually evolving. It fluctuates much like the mortgage market and the stock market. It is a full-time job to keep up with it. There is plenty of investment money out there at any given time to fund life settlement purchases. You just have to know where to find it.

The continual back-and-forth negotiation necessary to obtain the best offer for the purchase of a policy is something very few attorneys will want to bother with. And very few policy owners will have the slightest idea how to deal with these funders to their own best advantage.

When a life settlement funder gets an inquiry about the sale of a life insurance policy directly from a policy owner or an attorney, they see a probable sucker. The funding company knows that it is most likely the only source to which that policy owner, or lawyer, is bringing this policy for an offer. So they know that they can probably extend - and have accepted - a significantly lower offer than they would have to present through a broker who they know will be shopping the policy to a number of other funders also capable of funding the purchase.

A reputable life settlement brokerage only deals with major well-established and well-funded institutional investment firms. And never with private or small pool investors. This insures the highest possible offer for the policy.

Very few life insurance policy owners have the slightest idea that they might be able to sell their unwanted or unneeded life insurance policy much less how to deal with the life settlement market to their own best advantage. Therefore, these people should be able to depend on their estate planning attorney to advise them on the transaction. And attorneys would be wise to use a life settlement brokerage to facilitate the process to the best advantage of their client - and with minium hassle to themselves.

 

Who is Qualified for a Life Settlement?

• the insured is at least 62 years-old. Average age is 74 females, 72 males.
• insured has a life expectancy of two to twenty years.
• face amount of policy is $50,000 or greater.
• policy is past the two-year consideration period.

 

What is Needed for a Life Settlement?

The seller submits to the life settlement brokerage the necessary documentation:

• a completed application form
• a copy of the life insurance policy. Needed at the closing.
• an in-force ledger (an annual schedule of the policy details). Broker orders.
• a copy of any trust agreement if the policy is trust owned.
• a medical questionnaire and HIPAA form. (No physical exam is required )
Medical records are obtained by the funder/provider.

 

How Does the Life Settlement Process Work?

The medical records are transmitted directly from the physician of record to an actuarial evaluation firm that constructs mortality profiles. (The broker and the funder never see them.) This firm determines the reasonable life expectancy of the insured by a rather labor intensive process of coding and entering many variables into a very complex actuarial software program.

When the life expectancy is received by the broker, the application is complete and the broker conducts the underwriting process based on the economics of the life insurance policy. Those factors considered are:

• face value of the policy.
• current policy structure.
• current policy premium.
• rating of the insurance carrier.
• life expectancy of the insured.

There should never be any cost or obligation to have this appraisal done.

If the application proves qualified for purchase, the broker then presents the package to several funders which are the most appropriate for the particular circumstances of the policy at that time. The funders then decide what they are willing to pay for the package and extend their bids to the broker. The broker then transmits the highest offer to the policy holder, often, and preferably, through the attorney.

With this option now on the table, it is then up to the estate planning attorney to advise the client as to the best course of action.

As soon as a policy owner accepts an offer from a funder the money is immediately put into an escrow account. The insurance company then transfers ownership of the policy to the investor/purchaser. Payment is made to the seller by electronic transfer or overnight certified check. There is a rescission period - generally 15 days - after settlement and receipt of payment.

The entire process usually takes 4 - 6 weeks from application to settlement. The potential two bottlenecks in the process are delays by the doctor's office in transmitting the medical records and by the insurance company in carrying out the transfer of policy ownership.

Another anticipated question is: How will the purchasing investment company know when the insured dies? The answer is that an independent tracking company contracted by the administrator of the investment pool phones a contact person every month after the settlement. The contact person for this tracking company should be the attorney who is managing the insured's affairs. That way a monthly phone call is an ordinary business inquiry which would take less than a minute. A regular phone call made to the family of the insured can certainly be considered a crass and insensitive intrusion of family privacy.

 

Taxes

Generally, the cash basis, the amount paid to date in premiums, is non-taxable. If the cash surrender is greater than the cash basis, the difference is taxed as ordinary income. The difference between the cash surrender value and the amount of the life settlement is capital gain. However, if the cash surrender value is less than the cash basis, that difference is subtracted from the amount of the life settlement and taxed as capital gain. The sale of a life insurance policy may involve gift and/or estate tax consequences. These situations need to be handled on an individual basis by the estate planning attorney.

 

Confidentiality

The matter of confidentiality and security of identity has emerged as a major concern by many clients who have heard negative things about viaticals.

Many people considering selling their life insurance policy are going to realize that some third-party, some very shrewd third party, is going to have a financial interest in their death. These feelings of vulnerability are completely justified and must be dealt with from the very beginning with a confidentiality statement.

The thought of selling a life insurance policy is understandably intimidating to many people. These clients should be advised and counseled by their attorney through every step of the process.

As previously stated, a reputable life settlement broker only deals with major well-established and well-funded institutional investment firms and never with small pool or private investors. This warrants complete confidentiality and security of identity for the insured after transfer. Never are individual policies acquired by individual purchasers.

These firms purchase these policies with the guarantee that they will be held in diversified investment pools which are administered as blind trusts. No one is ever permitted access to the names or any other information about the insureds without a court order. And no one has ever heard of that happening.

The bottom line is that the parties involved in these pools which benefit from the proceeds of these life insurance policies upon the death of the insured never know who these insured are or anything about them.

 

Considerations

The life insurance industry has been doing and saying a number of blatantly unethical things to discredit life settlements. This has even been to the point that some insurance companies have issued directives to their brokers & agents to withhold information from their policy owning clients that there is an alternative to turning a policy back to the issuing carrier for the minimal surrender value: the alternative of a life settlement. One well-known company has even openly threatened termination.

The AARP, which holds great influence over the minds and actions of many senior citizens, has excoriated life settlements. BUT they have only written about - and condemned - life settlements from the investment viewpoint. This is entirely correct in and of itself. But so far the AARP has completely ignored life settlements for senior citizens as an alternative to a cash surrender of an unwanted or unneeded life insurance policy. This is extremely short-sighted on the part of the AARP because it could mean a great deal of much needed cash to millions of financially strapped elderly people.

Some attorneys still associate life settlements with the much maligned and justifiably discredited term viatical. Some attorneys still associate life settlements with the much maligned and justifiably discredited term viatical. A viatical is the sale of a life insurance policy whereby the insured of the policy has a diagnosed terminal illness with a life expectancy of 24 months or less.

Viaticals were effected in a largely underground market in the 1980's by the all too often unscrupulous purchasing of insurance policies from AIDS victims. These policies were then flipped to individual investors. Often both seller and investor were ripped off. And there was absolutely no confidentiality or security of identity for these very vulnerable insured.

In the past few years there have been a number of published warnings to all estate planning professionals about lawsuits for breach of fiduciary for failure to inform clients of the option of life settlements. Lawsuits have been filed against some of these professionals. However, most of the lawsuits pertaining to the life settlement industry have been regarding fraudulent investment schemes. I have not heard of any suits by people who have sold their policies under the advice and counsel of an estate planning attorney.

 

Conclusion

It is the estate planning attorneys' responsibility to help their client decide whether selling the life insurance policy is in the policy owner's best interest. Then after the life settlement process is completed and there is an offer from a funder, there is a whole new option and opportunity for the policy owner to consider what could not have happened a few years ago.