by Jerry Claiborne
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. Most seniors are not aware of Life Settlements and the possible additional wealth hidden in their life insurance policies.
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 US Census showed about 12 percent or 35 million Americans were at least 65 years old. By year 2030 it is expected that 1 in 5 Americans will be age 65 or older! As you can see the market of insured senior citizens is enormous.
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
♦ The need to exchange high annual premiums for monthly income
♦ Premiums no longer affordable
♦ Selling a business
♦ Surrendering a policy or one that is in danger of lapsing
♦ Needs funds for alternative investments
Life insurance is a valuable financial-planning tool for many, but if the need for life insurance coverage no longer exists, why would anyone keep paying for the policy?
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, age, health condition, and premium structure are factors that will determine whether someone qualifies for a life settlement. The following is a limited summary of the placement para- meters:
♦ Company Rating – B+ or higher
♦ Face Value Maximum – Unlimited
♦ Face Value Minimum – 100K
♦ Life Expectancy – Up to 15 years
Types of Insurance That Qualify
The following types of insurance qualify for a life settlement:
What Is Required For A Policy Evaluation?
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 life insurance 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.
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 takes even longer to evaluate the insured.
Life Settlements As An Income Opportunity
Actuarial data suggests that of people age 65 and older with life insurance policies currently in force, 40% of these policies will not be kept to maturity! This appears to be a significant untapped market and funding firms in the United States are aggressively looking for policies to purchase. Compensation will vary, but listed below are two examples of recently completed cases:
Client: 70-year-old male with health complications.
Result: $1MM policy with small cash value, Insured sold the policy and received $120K. Agent referral fee was $25K
Client: 70-year-old male in good health
Result: $500K policy. Insured sold the policy for $ 105K. Agent referral fee was $16K
Do you currently work with senior clients or have a network of associates that work with seniors? If you answered yes to this question, life settlements could present an excellent opportunity for a new revenue source. Life settlements are virtually unknown today and should be discussed with your senior clients. A major transformation will occur in the life settlement industry within the next few years. This exceptional growth will create new and significant profit opportunities for individuals who can incorporate life settlements into their business.
Types of Settlements – Past and Present
The life settlement market grew out of the viatical settlement market that came about in the 1990s 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 settlement 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. 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 terminally ill individuals. Life settlements are for seniors over the age of 65. These products have very different market focuses and should be considered as two separate entities.
Jerry Claiborne can be contacted at Global Life Solutions
E mail: [email protected]
by Jerry Claiborne