What Advisors (And Everyone) Need To Know About Life Settlements April 24, 2015 (San Francisco) by Carole S. Fiedler Most financial advisors I speak with have heard of Life Settlements, but do not fully understand how they work. They are not sure how their clients can benefit or even how to recognize when a Life Settlement should be considered. Many “captive” insurance agents are prohibited from even mentioning the Life Settlement option, though they are fully aware that a life settlement’s large lump sum liquid payments can greatly benefit both the agent and especially the client. What are Life Settlements? A Life Settlement is the sale of an in-force life insurance policy, for an amount discounted from the face value by an insured 65 years of age or older, and who does not have a terminal illness. Life Settlements create liquidity from a previously illiquid asset – the underlying life insurance policy. By liquidating a life insurance policy at the right time, options are created while other assets that may be less beneficial to liquidate can stay in place. One example would be selling one policy to provide funds for premium payments to maintain another policy. It’s a fact: As people age their need for life insurance changes. Policies are often obtained to protect a spouse, to cover college costs of the children, perhaps make mortgage payments or pay off the...
WHY SELL A POLICY? Or, WHEN SELLING A POLICY MAKES SENSE In my last blog I discussed Viatical Settlements for people living with a terminal illness. When someone gets seriously ill, his or her expenses go up and their income goes down. Having the option of selling a policy by utilizing a viatical settlement is a resource that many have found life enhancing when they need it most. But what about people who are older and have policies they no longer need or want? That’s when a Life Settlement might provide a better option that either surrendering the policy for cash value or simply letting it go altogether. There are many reasons someone might want to sell a policy other than the need for cash due to a terminal illness. It’s a fact that more than 80% of all life insurance policies either lapse or are surrendered for the cash value. When this happens, the insurance company never pays the death benefit yet gets to keep all the premiums paid. So why would anyone pay premiums for a life policy for many years then simply let a policy go? Perhaps the reasons for getting the policy in the first place have changed or no longer exist. A spouse passes away, a mortgage is paid off, the kids have graduated college and are successful on their own… When life insurance is deemed no longer needed, rather than simply letting the policy go, the owner might want to look into a life settlement if the insured is over 65. What happens when premiums get too expensive to pay? This is an example of...
WHEN SELLING A POLICY, TIMING IS IMPORTANT! Part 1, Life Expectancy (LE) When companies review the policies they are going to bid on with the intention of buying, they are first looking at two main criteria: What is the life expectancy of the person who is insured, and what is the premium expense for the duration of that life? So, as a potential policy seller, the first thing to think about when considering either a life or a viatical settlement is life expectancy (LE). For a viatical settlement, the guidelines are clear. Any insured person who is diagnosed with a life expectancy of 24 months or less, automatically qualifies for a viatical settlement. This was clarified in 1996 when the Health Insurance Portability and Accountability Act (HIPAA) was passed. This was before life settlements were offered. They began roughly in 1998. Under the Health Insurance Portability and Accountability Act (HIPAA), the proceeds garnered from viatical settlements for the chronically or terminally ill are free of taxes. HIPAA further defines terminally ill as a patient who has received a diagnosis “by a certified physician to have a life expectancy of under 24 months.” Being chronically ill under HIPAA means the patient has become “permanently and severely disabled by an illness.” The additional requirement for the proceeds of the sale being tax-free is that only properly licensed companies are used – both the broker and the provider must be licensed. ~~~~~~ ~~~~~~ As clear as it is to qualify for a viatical settlement, the opposite is true for life settlements. There is no hard and fast guideline like there is...
