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LIFE
SETTLEMENT
The NAIC Model Act defines a life settlement broker as:
“a person that on behalf of a policy owner and for a fee, commission or other valuable consideration offers or attempts to negotiate life settlement contracts between a policy owner and one or more life settlement providers. Notwithstanding the manner in which the life settlement broker is compensated, a life settlement broker is deemed to represent only the policy owner and owes a fiduciary duty to the policy owner to act according to the policy owner’s instruction and in the best interest in the policy owner.”
What is Life Settlement?
Life Settlement enables individuals, businesses, and/or organizations, as an alternative to surrendering policies, to sell the insurance policies they currently own, but no longer want or need, for an amount greater than the cash surrender value on the secondary market.
This process allows policy owners to receive the greatest value from an asset they no longer wish to maintain.
Life Settlements are designed to specifically serve the needs of:
 Individuals 70 years or older who may be experiencing a change in health
Individuals whose estate taxes are changing
Individuals who outlived the beneficiaries of the policy
Individuals who own more insurance than presently needed
Individuals who needs funds for alternative investments.
Individuals who needs funds for alternative investments
Individuals whose financial stress will cause a lapse in the policy
Individuals Selling a business
Partners whose Buy/Sell agreement is no longer needed
Company owned Key-Man policy where the executive is retiring
Individuals who wish to achieve their charitable giving objectives
In a Life Settlement transaction, the proceeds are treated as if the policy was first surrendered and then sold as an investment. No tax is due on the funds received up to the cost basis (premium paid minus non-taxed dividends) as it is treated as return of premium.
The difference between the cost basis and the cash surrendered value is taxed as ordinary income.
Anything the policy-owner receives above the cash surrendered value is treated as capital gain.
Example: A client age 76, owned a permanent policy, with a $1,000,000 Face Value, and cash value of $10,000, sold his policy for $200,000.
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Taxed As Capital Gain $140,000 |
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Cash Value Taxed As Ordinary Income $10,000 |
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Cost Basis Return of Premium $50,000 |
Speak to your tax advisor for advice on the tax consequences when selling a policy
Procedure for evaluating or selling a policy.
THIS IS DONE IN COMPLETE CONFIDENTIALITY
1. The policy owner completes an application along with signed authorizations.
2. We will gather all the necessary documentation (ie: Attending Physician Statements, Policy illustrations, etc…).
3. The file is submitted to a select group of funding organizations for independent review.
4. A biding contest is created to obtain the highest offer for the policy owner.
5. The offer is relayed to the policy owner for acceptance.
6. Once the offer is accepted, the contract is sent to the policy owner / and insured for review and signatures.
7. The signed contract is sent back to the funding company. The funding company sends the appropriate documents to the insurance company to change the ownership and beneficiary information on the policy.
8. Once the change of ownership is completed and verified, the funds are wired to the bank account designated by the policy owner
Frequently Asked Questions
1. By applying and going through the process, am I obligated to accept the Settlement offer?
Answer: No, there is no obligation on your part to accept any offer at any time.
2. What size policy face amount is considered?
Answer: In general, a policy with a minimum policy face amount of $200,000.
The premium should not exceed 6% of the policy face amount.
3. How old should my policy be before I can consider selling it?
Answer: 2 years. Insurance companies require a two-year “contestability clause” to investigate and rescind policies using fraudulent information.
4. How old should I be before I can sell my policy?
Answer: In general, insured age 65 and older. The best age range is insured between the ages of 75 - 85.
5. What is the difference between Viatical and Life Settlement?
Answer: Viatical deals with individual who is terminally ill, and whose life expectancy is generally less than 24 months. The process will usually be used for living and medical expenses. Life Settlement deals with individuals with life expectancy up to 15 years.
6. How long this process takes?
Answer: This process can take between 6-8 weeks
Once we obtained your authorization, we must obtain your medical records from your physician (s) that can take 3 weeks.
Sending the complete case to the funding company can take 1 week.
Getting the case underwritten and getting the best offer can take 2-3 weeks.
Sending the offer to the policy owner and getting back the contract signed can take 3-4 days.
Sending the signed contract to the funding company and have the changes made to the policy, can take 2 weeks. Once all the documents have been verified and all is in order, the escrow agent will wire the funds to the client within 3 days.
7. Is there a way for me to back out if I need to?
Answer: There is usually a 15 day right of rescission depending of the state.
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