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 for a viatical because different companies have different guidelines at different times. Each Provider (the companies who purchase the policies at a discount from the net death benefit) dictates what policies fit their purchasing criteria (buying parameters).
To make it more complicated, the funders, those sources who supply or lend money to the providers that is used to purchase the policies, may also dictate what life expectancies they require. One thing they are looking at is how long they are willing to invest their money. That goes directly to the life expectancies that the providers look for. Since each provider gets their money from different sources, and each source has different time-line preferences, not all providers are seeking the same policies at the same time. Even the minimum age of the insured can vary with 65 years being the most common minimum guideline.
With all these variables – and these are the most basic – it’s imperative to work with a seasoned life insurance settlement broker specialist who is in the marketplace day to day. With things changing all the time, they are the ones who know which providers are buying what, and, who may be paying a premium for policies at any given time.