Do you have a life insurance policy that you’re about to let lapse? Are you 65 years or older? 

There’s a really good chance that your life Insurance policy could be a hidden asset that you didn’t even realize you have. In this post, we’ll be explaining life settlements and addressing some of the common questions policyholders have about them.

What Is a Life Settlement?

A life settlement is the sale of an existing life insurance policy. In a life settlement transaction, you agree to turn over ownership of the policy to a third party in exchange for an immediate payment. When you pass away, this third party then collects the death benefit from the policy.

Life settlements almost always involve the sale of permanent life policies (such as whole and universal policies, as well as term policies that can be converted into one of these types). The buyer will take over all future payments of the policy to keep it active until the insured’s death.

Why Would I Want to Sell My Life Insurance Policy?

There are many reasons why someone would want to sell their life insurance policy. Usually, when most couples are young and first purchase their life insurance policies, it’s intended to cover their living expenses if something unfortunate were to happen to one or both of them. However, as we get older, our dependency on life insurance policies changes. Perhaps you’re both retired now or one of you have passed on, and there simply is no longer a need for income replacement. Or the children have now become adults and moved out of the house.

As we get older, the cost of life insurance also starts to rise dramatically. Perhaps the cost has become too great and you no longer wish to pay to keep it active. Sometimes a life settlement can be a great way to receive an immediate cash payout for retirement, unexpected medical expenses, or even future nursing home care.

Am I Eligible to Make a Life Settlement?

Generally speaking, the best candidates for selling their life insurance policies are those who are closest to the average life expectancy (age 78.6 according to the CDC). A history of past illnesses or current poor health can also increase your chances of making a life settlement as well.

However, if you’re in perfect health, that doesn’t automatically exclude you from selling your policy either. At a minimum, most providers will consider you if you’re at least age 65 and your policy carries a death benefit of $100,000 or greater.

How Much Money Can I Make From a Life Settlement?

Many factors go into determining the value of a life settlement. Usually, these include considerations such as your health status, age, the ongoing cost of premiums, and many other details about your policy.

To give you a ballpark, most policyholders can expect to receive anywhere between 10 to 25 percent of the policy benefit amount. That would mean for every $100,000 of benefit, you might expect to receive anywhere from $10,000 to $25,000. However, keep in mind that this amount will also be decreased by the fees associated with the transaction, as well as taxes that will be collected by the IRS from the sale of the policy.

What Are the Risks of Making a Life Settlement?

Perhaps the biggest risk of making a life settlement is the fact that your intended beneficiaries will no longer receive a benefit upon your death. This is why it’s important to make sure that they will truly no longer need this if something unfortunate were to happen.

In addition, life settlements can hinder your ability to receive Medicaid if you require it later on. It can also make it more difficult to obtain another life insurance policy if you try to purchase a new one.

How Do I Make a Life Settlement?

If you’ve taken all of these points into consideration and would like to move forward with a life settlement, the best thing to do is to work with a professional broker who can help secure the best deal for you. Work with a member of the Life Insurance Settlement Association (LISA).

Written by LISA

The Insured’s Age and Health Status

The most important driver of value in a life settlement transaction is the life expectancy of the insured. Age, smoking status, sex and many other factors related to the insured’s health have an influence on life expectancy. For example, the older the insured, the shorter the period of time a buyer will have to wait to collect the policy’s death benefit. Also, since the buyer will have to pay premiums until the insured passes away, the shorter the period during which they have to do this, the more attractive the policy can be. So, since age is a very significant factor with regard to life expectancy, most but not all life settlements involve older age insureds.

Along the same lines, if the insured is in a state of declining health that influences their life expectancy, a policy covering them may be more valuable. Again, the greater the probability that the policy will mature in a somewhat measurable period of time, the more likely the policy’s value will be more attractive to life settlement investors.

The Policy Death Benefit

The death benefit of the policy is a major factor in determining if a life insurance policy is salable. Generally speaking, the policy’s death benefit should be at least $100,000. As you might expect, the greater the death benefit, the more lucrative the life settlement value will be. This is because a policy with a large death benefit pays out more money at maturity, and thus commands a higher price to the seller in a life settlement transaction. 

Future Policy Premiums

When a policy is sold and becomes a life settlement, the investor who buys it becomes the policy owner and is responsible for future premium payments. The investor keeps the policy in force until the death benefit is collected. So, the amount paid for the policy plus the premiums paid while it is held are the primary costs associated with buying a life settlement. Premiums can have a significant impact on the return the investor earns when they collect the death benefit. 

Of course, not all life insurance premiums cost the same. Depending on when the insured party purchased the policy originally, and what their medical status was at the time, some policies may cost substantially less to maintain and keep active when compared to others.

The Policy’s Cash Value

If the insured has already spent several years building-up cash value in the policy, then this could positively influence the value of the life settlement as well. This is because the cash value of most policies can be used to pay future premiums. So, if a policy with cash value is sold,  the amount of money needed by the investor to keep the policy active will be reduced, and that can make the policy more valuable.

 The Discount Rate

Like all investments, the buyer’s ultimate objective is to earn a rate of return from purchasing an unwanted policy and paying premiums until the policy matures. However, because the actual return on a policy cannot be known precisely until the death benefit is collected, buyers use a discount rate to estimate the rate of return they hope to achieve by investing. This rate is commonly known as a discount rate.  Buyers perform a series of calculations using their chosen discount rate to produce a discounted cash flow analysis. They use this analysis to decide what to pay for a given policy, taking into account all of the variables described above, as well as many others.

While discount rates and interest rates are not the same thing, if interest rates are low, buyers may be willing to use lower discount rates to price policies. Part of this decision is tied to the comparison all investors make between various investments and the rates of return they can earn by investing in different instruments. All investments offer differing degrees of risk and return and interest rates are often used as a means of comparing these returns across different assets. 

 Putting It All Together – The Rate of Return

While it may be generally understood how each of these factors contributes to the value of a life settlement, the final determination will require performing some calculations. For example, let’s assume a policyholder has a policy with a $250,000 death benefit and the average annual premium over the next 10 years is $12,000 per year. And in this example, an investor pays $50,000 to buy the policy and pays $120,000 in premiums ($12,000 per year over 10 years) by the point of collecting the death benefit. In this example, the investor will have invested a total of $170,000 over 10 years to get back $250,000. To compare this investment to any other, the buyer can calculate a rate of return based on these facts and use it to compare with other investments. In this case, the investor’s rate of return would be 6%.

Of course, this is just a simple illustration to demonstrate how these factors might influence the value of a policy. The payout to the insured, as well as any commissions, fees, and taxes, will also play a role in the overall investment outcome to the investor, and life settlements, like all investments, bear some risk. 

Written by LISA

Taxation on life settlements has always been a grey area for fiduciaries who decide to sell their client’s life insurance policy for a lump sum payment versus merely letting the policy lapse or be surrendered for a fraction of the value.

What is a Life Settlement and why can it be appropriate for corporate fiduciaries?

A life settlement is the sale of a life insurance policy, on a senior insured, for a payment greater than the cash surrender value but less than the death benefit.  The buyer of the policy takes over all premium payments and receives the death benefit upon the insured passing away.  It makes perfect sense in the right situation (policy is no longer affordable, no longer needed, going to lapse, etc.) for fiduciaries that serve as Trustee to consider a life settlement instead of simply having the policy lapse or be surrendered back to the insurance company for a fraction of the value.  Why?  The policy may be marketable in the secondary market and as Trustee, there is a duty to maximize the value of this asset which might be missed if it simply lapses or is surrendered. 

Determining the taxation from life settlements has been a real headache since IRS Ruling 2009-13 was enacted in 2009 which required policy sellers to reduce their tax basis in a life insurance policy by deducting “cost of insurance” charges from their cost basis (typically the amount of premium paid into the policy).  Many insurance companies have difficulty calculating a policy’s cost of insurance charges upon request.  As a result, it left a lot of ambiguity regarding the taxation of these transactions which only further complicated an already complex transaction.

The 2017 Tax Cuts and Jobs Act includes language that reverses IRS Ruling 2009-13.  This means that beginning in 2018, policy sellers will receive the same tax treatment as those who surrender their policies, eliminating the burden and ambiguity around calculating the tax for a life settlement transaction and also reducing the tax liability making life settlements more attractive.

EnTrust Settlements is a member of the Life Insurance Settlement Association (lisa.org) which has supported efforts to change the tax provisions since their inception in 2009, including support of legislation introduced in 2012 by Sen. Bob Casey [D-PA] and similar bills introduced by Rep. Patrick Tiberi [R-OH] in 2016 and again in 2017.  LISA staff met earlier in 2017 with the Majority Tax Staff of the U.S. Senate Finance Committee, as well as a Washington D.C. tax specialist to explore alternatives available to amend IRS Tax Ruling 2009-13.

“We are delighted that Congress has taken this important action to rectify an error in tax policy, which created an unfair burden on sellers of secondary life insurance policies,” said Darwin M. Bayston, CFA, president and chief executive officer of LISA. “We believe that seniors should be afforded the opportunity to realize the full value of their policies. This reform in the tax law further clarifies that the marketplace for life settlement transactions is safe, healthy and well-regulated.”

About EnTrust Settlements

EnTrust Settlements (www.entrustsettlements.com) is a life settlement brokerage firm that partners with corporate trustees, financial advisers and individuals acting in a fiduciary capacity to broker the sale of life insurance policies utilizing industry best practices.  EnTrust has helped convert problematic life insurance policies into cash since 2007.  For more information & to contact us for a free consultation, please visit us at https://entrustsettlements.com/contact.

Many wealth managers and estate-planning advisors will counsel their high-net-worth clients to purchase life insurance policies inside of a trust. Trustees, which are often professional management firms, then maintain the policies. This can be very smart financial planning, as trust owned life insurance (TOLI) can allow families to achieve a variety of important tax planning and charitable giving objectives.

When a trust owns life insurance, the trustees are assigned the responsibility (under the prudent investment rule and relevant state laws) to exercise proper oversight of that asset in the trust. This involves evaluating the financial health of the policy, considering prudent techniques for paying the policy premiums and managing the policy in a way that integrates with other estate-planning strategies.

Unfortunately, many wealth management professionals fail to view the underlying asset inside the trust – the life insurance policy itself – the same way they would consider other assets (for example, stocks, bonds and real estate) and rarely re-examine the life insurance policy for its current value in the marketplace. Perhaps this is because they assume life insurance is just a stagnant holding with a pre-determined cost of maintenance and an eventual payout to the trust when the insured person dies.

But this isn’t the case.

Evaluate Policy’s Financial Health

Wealth managers and estate planning advisors can’t afford to be asleep at the wheel when it comes to evaluating the financial health of a life insurance policy sitting inside of a client’s trust. Due to its long-term investment horizon to maturity, trustees charged with managing the overall trust often overlook TOLI — but as Jeff Hallman, managing partner of LISA member Asset Life Settlements, LLC, points out: “The percentage of TOLI policies at risk of lapsing is expected to increase, due in large part to the low interest rate environment, which is jeopardizing the expected earnings potential for universal life policies.”

In addition to the risk of inadvertent lapse, there’s the suddenly emerging threat of premium hikes imposed by insurers. If your client’s policy is affected by a premium increase, you need to assess whether the proposed new price makes sense in the context of the overall expenses of the trust portfolio. The best way to do that is to understand the financial upside to retaining the policy versus exploring alternatives, such as selling the policy to an institutional investor in a life settlement transaction.

A life settlement is the sale of a life insurance policy to a third party for a value in excess of the policy’s cash surrender value (CSV), but less than its death benefit. The trust receives a cash payment, while the purchaser of the policy assumes all future premium payments and receives the death benefit upon the death of the insured. Approximately 40 percent of life settlement transactions involve TOLI policies.

Consideration of this Option

Consider this true story, courtesy of LISA member EnTrust Settlements, based in Omaha. Bill, a trust officer, identified a policy to be significantly underfunded. The projected annual premium to mature the policy was $84,020 and, with no further funding, the policy was projected to lapse in six months. The grantor didn’t want to contribute any more money to the policy, and there was only $10,000 of CSV. An evaluation showed the potential to have significant value above the CSV on the secondary market. Bill disclosed this option with the grantor, who then wanted to proceed with a life settlement option. EnTrust Settlements was able to secure $360,000, net of fees, and the trust now manages the life settlement proceeds.

Life settlements present an opportunity for your clients to liquidate an asset in their trusts and put that new cash to work for either cash flow needs or for other investments. This not only fulfills the trustee’s obligation to exercise proper oversight of the assets in the trust, but also provides a vehicle for financial advisors to advance client portfolios and bring more assets under management.

Mar 16, 2017 | By Darwin Bayston, CFA – President and CEO – Life Insurance Settlement Association

Article published on wealthmanagement.com

Last week, the Wall Street Journal reported on the latest developments in a wave of sudden insurance premium hikes on life insurance policies that have been in force for decades.

As documented by the Journal’s Leslie Scism, “over the past year, several major insurers have notified tens of thousands of people of higher costs to keep their policies in force, with increases ranging from midsingle-digit percentages to more than 200%.” Scism noted that in response to these premium increases, a number of lawsuits have been filed in federal courts against life insurance companies.

I’ve had the privilege of working in the investment advising and financial planning industries for decades. In the past, it was a point of pride for life insurance companies that the premiums illustrated to a consumer at the time the policy was sold to them would stay the same while the policy is in force. This basic promise between insurers and their customers promoted confidence in life insurance products as staples in the financial plans of American families.

Unfortunately, a number of insurance companies are now breaking that basic promise. Reeling from years of low interest rates that have put a pinch in their quarterly profits, many carriers are trying to make up for the drop in interest income by collecting higher premiums from their policy owners. For seniors living on fixed incomes or retirement funds already under stress, these premium hikes may simply be too much to bear.

These insurance companies have been notifying policy holders that they have three options: (1) Pay higher premiums in order to keep their existing death benefit; (2) Maintain the same premiums but sacrifice some of their death benefit on the policy; or (3) Surrender the policy back to the insurance company for its cash value. But if you are one of the American seniors facing an increase in your life insurance premiums, you may have another option that – unfortunately – the insurance companies are not sharing with you.

You may want to consider selling the policy to a third-party investor for immediate cash payment, known as a life settlement transaction. Candidates for life settlements are typically aged 70 or older, with a life insurance policy that has a death benefit of more than $100,000. The sale of your policy can bring you four to seven times more money than the cash surrender value of your policy, not to mention alleviate the burden of having to deal with those rising premiums.

If your life insurance premiums are suddenly increased, be sure to explore ALL of your options – not just the ones offered by the company that sold you the policy and now wants to change the price.

Sep 8, 2016 | By Darwin Bayston, CFA – President and CEO – Life Insurance Settlement Association

The U.S. life settlement industry is well positioned for sustained long-term growth, according to speakers at the Life Insurance Settlement Association’s (LISA) 22nd Annual Spring Life Settlement Conference, held over the past two days at the Hilton Palmer House in Chicago.

“The future of the U.S. life settlement market has never looked brighter, fueled by demographics trends that offer enormous potential to drive growth,” said Colin Devine, Principal of C. Devine & Associates and a veteran life insurance industry analyst. “With 75 million Baby Boomers retiring, there is no single solution that will address all of their financial challenges. Life insurance settlements may increasingly become a core financial planning tool for these seniors as they look at all available assets to produce retirement income and address long-term care needs.

Devine walked conference attendees through developments in the life insurance industry, including product trends and M&A activity in the works. He also reviewed a number of regulatory changes underway that are designed to increase consumer protections throughout the financial services and life insurance industries.

In addition to Devine, the conference featured keynote addresses from Paul Green, Director of the Institute for Politics at Roosevelt University in Chicago, who provided a geopolitical forecast, and S. Jay Olshansky, Ph.D., Professor in the School of Public Health at the University of Illinois at Chicago, who shared some of his latest research on estimating life expectancy.

“There are encouraging signs that we have transitioned to growth from all corners of the life settlement industry,” said Cyndi Poveda, CEO of Life Equity LLC and chair of LISA. “Consumer awareness of the life settlement option is growing, the infrastructure of our industry is stronger and capital continues to enter the market from institutional investors. This is a healthy industry that is well positioned for sustained long-term growth.”

A life settlement is the sale of a person’s life insurance policy to a third-party investor. In a life settlement, the policy’s owner transfers the ownership of that policy in exchange for an immediate cash payment from the buyer. Candidates for life settlements are typically 65 or older, with a life insurance policy that has a “face value” (death benefit) of more than $100,000.

“As consumer awareness of life settlements increases, and seniors begin to strike out on their own to explore the possibility of selling a life insurance policy, the next frontier for our industry may be connecting consumers directly with a broker or a provider to purchase that policy,” said Darwin M. Bayston, CFA, President and CEO of LISA. Bayston moderated a panel, “Considerations When Working Directly with the Consumer,” which featured comments based on hands-on experience from Alan Buerger, CEO of Coventry Direct, C.E. “Bud” Dean, managing partner of ReverseLifeInsurance.com, and Peter Colis, CEO of Ovid Corp.

Other conference session topics included the latest underwriting and life expectancy trends, economic forecasts and how they will affect the life settlement industry and consumers, fiduciary standards for advisors and analysis of the Department of Labor’s new fiduciary rule, the newest information on Cost of Insurance (COI) increases and in-depth coverage of investor issues.

LISA’s 2016 Spring Life Settlement Conference brought together a wide range of industry participants – including life settlement brokers, providers, service providers and institutional investing professionals – to discuss marketplace developments, regulatory and legislative updates, best practices when working with consumers and new business opportunities.

Life Insurance Settlement Association, 17 May 2016