One fairly new investment that has gained attention in recent years is
the senior life settlement. What are senior life settlements?
Life settlements evolved from the viatical
industry in the 1990s, when people diagnosed with terminal illnesses such as
AIDS, usually facing life expectancies of three years or less, sold their
life insurance policies on the secondary market to cover costs of their
health care. These types of investments have gradually increased over the
years and have paved the way for investors to become more attracted to
senior life settlements.
A senior life settlement is the sale of an
unwanted or unnecessary life insurance contract by an elderly individual to
a third party investor for an amount less than the face value, but in excess
of the cash surrender value.
Life settlements were developed out of the
need for seniors to attain access to their death benefit while still living.
With a life settlement, the insured has a medically determined life
expectancy of three to seventeen years. Such a sale allows individuals to
sell an asset for fair market value and provide funds for their personal
use.
Senior life settlements are used when the
circumstances that the policy was originally purchased under have changed.
There are several situations that can create a need for a life settlement:
- The policy owner owns multiple life
insurance policies and wishes to eliminate one.
- The beneficiary for whom the policy was
originally purchased is now deceased or no longer has
a need for the policy.
- A reduction in the value of the policy
owner's estate reduces the tax liability for which the
policy was originally designed to provide.
- The policy owner wishes to make a
charitable contribution, but would be faced with
liquidity constraints as the result of such a donation.
- The policy owner can no longer afford
to pay the premiums.
For example:
An 86-year-old female insured with a
universal life policy with a face amount of $1.6 million and a
cash-surrender value of $0 could no longer afford the annual premium
requirements. The trustee of this policy, a bank, made the decision to sell
the policy rather than continue to pay the premium. A senior life settlement
provider purchased the policy for $700,000.
The owners of a $1 million survivorship
policy, a 77-year-old male and a 67-year-old female, no longer needed this
policy for estate tax purposes due to the recent federal estate tax law
changes. They could surrender the policy for the cash value of $105,000.
They wanted to use the money for a down payment on a retirement home, so
they sold their policy on the secondary market for $300,000.
A business owner, age 69, had a 10-year,
$500,000 term-life insurance policy that was about to expire and no longer
needed the coverage after selling his business. The business owner decided
to convert the policy to a universal life contract and sell it in the
secondary market, rather than surrender the term policy. A senior life
settlement provider purchased the policy for $50,000.
During the process of a senior life
settlement, the policy owner enters into a contract with a third-party
investor and receives a lump-sum cash payment from the investor. In
exchange, the owner will transfer ownership of the policy to the investor.
The investor will appoint a new beneficiary and will collect the death
benefit upon the insured's death or the maturity date of the policy. Upon
the purchase of the contract the buyer/investor will continue to make
premium payments throughout the course of the insured's life or until the
policy matures.
The value of an insurance policy is based
on various criteria. Among the important factors in determining the life
settlement are the following:
- Life expectancy of the insured
- Face amount of the policy
- Premium requirements to keep the policy
in force
Life settlements have progressed quickly
since their beginning as viatical settlements in the 1990s. According to
recent studies performed by the University of Pennsylvania business school,
The Wharton School, consumers were paid about $340 million for their
underperforming life insurance policies in 2003. Another study performed by
Conning & Company Research found that senior citizens owned approximately
$500 billion worth of life insurance in 2003, of which $100 billion was
owned by elderly individuals with qualifying policies. According to
estimates by the leading investors in the industry, life settlements will
total $10 billion to $15 billion this year alone. Private studies estimate
that this equates to around 19,000 policies sold. On current progress, it is
expected the global market will be worth around $125 billion by 2015. n
Leo M. LaGrotte Jr. is the president and
chief executive officer of Life Settlement Advisors. LaGrotte has worked in
the insurance and estate planning industry for more than twelve years and
has a strong background in the life insurance and the life settlement
marketplace. LaGrotte is a member of the National Committee on Planned
Giving, the Community Bankers Association, and the Estate Planning Council.
He earned his bachelor’s degree in Business Management / Entrepreneurship
from Ball State University. The author can be reached at (317) 488-5571 or
by emailing [email protected].
Time for a Policy Review?
A policy performance review (PPR) is a
comprehensive audit of an existing life insurance policy. All the vital data
regarding the policy and the insured is compiled and reviewed. It generally
takes approximately two weeks to examine the current policy and available
alternatives. Many people with a policy issued two or more years ago will
have the option of money saving alternatives. Many of those same people have
not only had the option to save money, but also have been able to lengthen
the guarantee of their coverage with a lifetime guaranteed product. Life
Settlement Advisors likes to think of life insurance as the heart of the
financial plan. If you have life insurance policies more than two years old,
it may be time to get a policy “check up”. |