Life settlements -Lisa History

A quick and informational guide for financial professionals

Read through this to find some helpful info.
In the insurance world, “life settlement” transactions are a new trend gaining popularity. Virtually, every insurance professional has heard about this industry in the news, online, or through other professional forums. This innovative and fast growing market has seized the attention of financial markets, insurance professionals, and senior consumers all over America. Yet, BGA’s, MGA’s, and other interested parties seeking to learn more about life settlements are puzzled by the overwhelming yet fragmentary information emerging from all types of sources. A simple Google search for “life settlements” instantly yields over 2.4 million results. Where to start? This article provides financial professionals a good place to begin. Here, you will find basic definitions and explanations to help develop a simple and clear picture of life settlements.

Until recently, the only options for liquidating an underperforming or unneeded policy was to let it lapse, sell it back to the original insurer for its current net cash surrender value, or exercise a policy non-forfeiture option.

But thanks to an increasingly competitive secondary market, known as life settlements, life insurance is no longer being treated as simply a death benefit. Like other types of personal holdings, life insurance has evolved to become an asset with a fair market value and may be sold by its owner at a market price higher than its net cash surrender value under specified circumstances.

This sale of an insured’s existing life insurance policy to a third party known as a life settlement provider in exchange for a lump sum cash payment is called a life settlement. A life settlement is for an individual who does not have a catastrophic or life-threatening illness or condition. In a life settlement, the sale price is less than the policy’s face value, but is higher than the policy’s net cash surrender value. Upon selling one’s insurance policy to a life settlement provider, the policy owner is relieved from making future premium payments.

The history of life settlements is relatively short. Beginning in the early 1990’s as viaticals, the rise of the life settlement market shortly followed. A viatical is the sale of a life insurance policy, by an insured, who has a terminal illness, that can reasonably be expected to result in death within a relatively short amount of time (many states vary as to the amount of time in which an illness is considered to be terminal, for instance Pennsylvania considers 24 months or less terminal, whereas Texas stipulates 48 months or less to be terminal). Viaticals were brought about, in some respect, by the AIDS epidemic of the early 90’s.

What is a Life Settlement?

A life settlement is defined as a financial transaction in which a policy owner possessing an unneeded or unwanted life insurance policy sells the policy to a third party (the funder) for more than the cash value offered by the life insurance company. The purchaser becomes the new owner and beneficiary of the policy and is responsible for all subsequent premium payments. Or simply stated, a life settlement is the sale of a life insurance policy for a lump sum that is greater than the policy’s cash surrender value, but less than its death benefit.

Until recently, a policy owner had few options when it came to life insurance that they no longer needed, wanted or were able to afford. They could either surrender the policy back to the insurance company for the cash surrender value or simply allow the policy to lapse and lose what they had paid into the policy over the years. A life settlement offers a new option — a lump sum payment potentially in excess of the cash surrender value.

Step One: The policy owner who would like to sell a life insurance policy is required to fill out an application, a “policy information release” and a “medical information release.” The “policy information release” allows processors (or life settlement brokers) to retrieve information about the policy from the life insurance carrier such as the policy illustrations, premium amounts and due dates, and verification that the coverage is enforced and current on premiums due. The “medical information release” allows the processor (broker) to retrieve the last 5 years of medical information from the insured’s physician(s).

Step Two: The medical information is sent to a third party life expectancy company which will issue a private report within 15 to 20 business days. This report is a broad mortality curve of 1000 people with similar age and medical condition. This report is not shared with the insured or policy owner.

Step Three: The Life Expectancy Report and the insurance information is packaged together by the viatical life settlement broker and sent to multiple institutional buyers (providers). These buyers then submit offers to purchase the policy. The processor (broker) works to seek the highest possible offer.

Step Four: Once the policy owner(s) accepts the highest offer from those offers submitted, purchase contracts will be drawn up by the provider and sent to the policy owner. The policy owner will be required to fill out and sign a change of ownership and change of beneficiary form to send to the insurance carrier. In many cases, the contract must also be signed by the policy’s beneficiary.

Step Five: Similar to a real estate transaction, an escrow agent is used in the sale and change of ownership of the policy. Therefore, the Institutional buyer will send the sales proceeds to a third part escrow agent while the change of ownership/beneficiary forms are being processed by the insurance carrier. This prevents the buyer from holding the sale proceeds and the ownership of the policy. Unlike a real estate closing transaction, you will not incur any closing fees in a viatical/life settlement transaction.

Step Six: Once the escrow agent verifies change of ownership/beneficiary, the funds will be wired to you, the seller.

While laws and regulations from one state to another differ as to the definition of a “viatical settlement” versus a “life settlement”, each generally involves the sale of an existing life insurance policy or of benefits payable under a life insurance policy to a third party. In return, the policyowner receives an immediate payment that is a percentage of the face value of the policy and higher than the cash surrender value offered by the insurance carrier. The difference between the two types of settlements stems from the condition of the individual policyowner. If the insured under the policy has a particular type of illness or condition (again, depending on the laws of the state in which the policyseller resides) the transaction is considered a “viatical settlement”, but if the person does not have an illness or condition fitting those definitions, the transaction instead is considered to be a “life settlement”. Some states treat these differently than others, so it is important that we have as much correct information about the policyowner and the insured, so that we can help you determine whether we are able to work with you.

Here is a link back to our site.  http://www.lifesettlementscorp.com

Glossary

CSV = Cash Surrender Value

Cost Basis = Total dollar amount of premiums paid into the policy less annual cost of insurance

Settlement Amount = Purchase price paid to policy owner/seller for the sale of the policy

1. If there is no CSV or if the CSV is lower than the cost basis in the policy, then the taxable income is the dollar difference between the settlement amount minus the cost basis of the policy. That amount is treated as a capital gain.

   Capital Gains Tax = Settlement Amount - Cost Basis

2. If the CSV is higher than the cost basis, then that difference is treated as ordinary income and taxed according to the policy owner’s tax bracket. Then, the difference between the settlement amount and the CSV is treated as a capital gain.

   Ordinary Income Tax = CSV - Cost Basis
   Capital Gains Tax = Settlement Amount - CSV

3. If the cost basis in the policy is actually higher than the settlement amount, then there should not be any taxable income from the transaction.

   No Taxable Income = Settlement Amount - Cost Basis = ( - ) Negative Value (Loss)