Life Settlements

Best Practices Are Essential for Life Settlements
by Robert W. Larsen

It is critical for financial professionals to follow best practices to ensure the highest offer and greatest outcome for every client especially in light of the current economy and an increasing need among the senior community and their families to access funds sooner than later.

It is critical to ensure a beneficial outcome that a life settlement is truly the client’s best option. Evaluate the original need for purchasing the life insurance policy. The policyowner’s original planning needs often change so that the policy is no longer needed. Many policyowners choose the life settlement option because changes in their circumstances have caused them to reconsider their life insurance coverage.

Here are some examples of those changes:
• Since premiums have become a burden, the policyowner plans to surrender their policy to the insurance company for cash or simply allow their policy to lapse without knowing its true economic value.
• The policyowner has outlived the beneficiaries and no longer needs the policy.
• A beneficiary has changed on the policy due to death or divorce.
• Children have become independent.
• The policy’s original purpose no longer exists.
• A family member needs capital right now.
• Money is needed to provide for the increasing cost of long-term care or medi-
cal assistance.
• A single life insurance policy is no longer appropriate. A survivorship policy meets the estate planning need.
• Changing estate planning and tax laws have reduced the need for high premium insurance coverage.
• Less insurance is needed to fund the projected estate tax liability since the size of the estate has been reduced due to loss of net worth or estate reduction techniques.

Policy Appraisal and ROI Analysis

Before moving forward with the life settlement process, it is important to analyze and evaluate a client’s policy carefully to determine an accurate estimated value they will receive. Some firms may offer a free preliminary appraisal service for clients to help them understand their options.

 

Case Study Examples Using an Appraisal Process:

• A 72-year old male client held a $4 million universal life policy. Due to a change in circumstances, he no longer wanted to fund the policy and was prepared to accept a cash surrender value of $538,000. After a policy appraisal and ROI analysis, he moved forward with the settlement process and received $1,041,840.
• A 69-year old male client held a 10-year, $10 million term policy and his premium was about to increase. He didn’t want to fund the policy at the increased cost, so he planned to let it lapse by default. After he was advised to have the contract appraised, the client moved forward with a life settlement option, which resulted in a negotiated amount of $1,460,000
• An 84-year old female client held a $3 million universal life policy and was paying an uncomfortable $166,000 per year in premium. She no longer needed the insurance since her assets had depreciated. After a policy appraisal and ROI analysis, she was able to get $1,090,000 through the life settlement process, which was $600,000 more than the cash value.
An accurate ROI breakdown allows clients to make educated decisions about their insurance options when evaluating the merits of keeping versus selling a policy. This important practice assures clients that, when they do decide to begin the life settlement process, it is truly the most suitable option.

Work with Qualified Buyers and Settlement Professionals

When a client pursues the life settlement option, the best way to ensure increased bidding and the highest gross offers is to work with a firm that has relationships with a wide variety of credible, reliable, and qualified institutional buyers, such as corporate or bank investment funds. A client should always avoid selling their policy to an individual buyer. It’s also important to research the professional experience and track record of any firm before allowing them to shop a client’s policy.

Ensure Transparency

Clients are increasingly seeking firms that offer transparency over the sale of their policy. Offering details about the gross and net offers and the commission structure will continue to become a key factor when selecting any firm to handle the settlement process.
The life settlement market is here to stay and policyowners will continue to become more educated about their options – in turn requiring financial professionals to expand their expertise.
––––––––––
Robert W. Larsen is managing partner for Settlement Plus. Settlement Plus is a professional life settlement firm that uses a network of institutional funding sources, industry expertise, and advanced policy appraisal tools to secure the highest offers. With nearly 30 years of experience, the company has generated millions of dollars for clients through life settlement transactions. For more information, visit www.settlementplus.com.

A Brief Overview of the Life Settlement Industry

In the midst of billion-dollar bailouts, escalating national debt, and widespread unemployment, Americans have been hit hard and they are increasingly seeking alternative ways to access cash -- now. The life settlement option is one such alternative. This powerful tool, which has been too often overlooked by policyholders and financial advisors, allows seniors (generally 65 years of age and up) to sell their unwanted or unneeded life insurance policy to a third party for a significant amount above its cash value.

Senior policyowners are using their settlement funds to achieve financial freedom and support long-term care costs, eliminate debt, pay off property taxes and mortgages, contribute to charity, invest in stocks or bonds, purchase replacement life insurance, and achieve other goals.

The life settlement industry has experienced both acute criticism and tremendous growth since its inception. It began in 1911 when the Supreme Court established the policyowner’s right to transfer ownership of a policy. Justice Oliver Wendell Holmes declared that, since owning a life insurance policy possesses all of the same characteristics as owning property, it represents an asset that a policyowner can transfer without limitation. This revolutionary opinion placed life insurance in the same asset category as more traditional property, such as a home, car, or stocks and bonds, which would allow a policyowner to transfer their policy to another party at their own discretion.

The industry reached its most significant milestone in 2001 when the National Association of Insurance Companies (NAIC) took a critical step by releasing the Viatical Settlements Model Act to counteract fraud and ensure sound business practices related to buying and selling insurance contracts. Life settlement regulations quickly ignited a heightened interest among institutional buyers and high net worth policyholders, which has continued to drive market expansion.
A recent study by Conning Research and Consulting Inc. reveals that more than $12 billion in U.S. life insurance face values was processed through life settlements in 2007, representing the most significant industry growth since 2005. Further, the research firm predicts this increase will continue to fuel its expectations for market growth through 2010.