What Is A Life Settlement?
A life settlement is the financial transaction in which a senior citizen sells their unwanted or unneeded life insurance policy to an institutional third party for more then its cash surrender value. The insured receives cash now for the policy. The institutional investor, or purchaser becomes the new owner and beneficiary of the policy. The purchaser will continue to pay the premiums from the time of the sale to the insured passes away. Upon the death of the insured, the purchaser will collect the benefit.
Life settlements are available to all senior citizens over the age of 65 with an inforce insurance policy, usually with a death benefit of over $250,000. In every life settlement transaction the insured’s life expectancy will be obtained using underwriters who use the insured’s medical records and mortality tables. Based on these life expectancies and the cost of the insurance per year to keep the policy inforce to age 100, the institutional investors will make offers on the policy that are always above the cash surrender value of the policy but less then the death benefit.
Should the insured accept the offer from the purchaser, the insured will sign over the ownership and beneficial interest in the policy for the agreed upon purchase price. The money received by the insured for the sale of an insurance policy is tax free up to the amount of premiums paid into the policy to date by the insured. The excess is considered long term capital gains.
For example, a male insured, age 70, in average health recently had a $750,000 universal life policy with a cash surrender value of $5,000,which he took out 20 years ago as a protection for his children’s college educations should he pass away. As his children are now grown, he longer needs the coverage. An institutional buyer recently purchased this unneeded policy for $77,700 or $72,700 more then its surrender value. Clients can expect offers, such as this one which are substantially larger then the policies surrender value.
A life settlement is not only valuable for seniors who no longer need or want their policy, but also for insured’s whose policy has become cost prohibitive but the need for coverage still exists. Seniors can utilize life settlements by selling their existing, cost prohibitive policy and use the money from the purchase to buy a new policy of the same death benefit but with extra cash in the policy the premiums will be lower. This is called insurance re-finance.
Any senior citizen interested in life settlements, or who feels they should have their policy evaluated on the open market should contact their insurance agent or financial advisor who should have a licensed settlement broker that they work with. All life settlement brokers should have licenses in that states that require them as well as be members of the Life Insurance Settlement Association.
Where Can I Get More Information?
If you wish to learn more about life settlements and selling your policy in the secondary market visit Life Settlement Analyst.
What Is Premium Financing?
Premium Finance is the lending of capital by a bank or a hedge fund to pay the premiums of an insurance policy for a predetermined length of time, usually from 2 years to the life of the policy. There are two types of premium financing programs available; recourse and non-recourse premium financing.
Recourse premium financing is a lending mechanism where the insured puts up a letter of credit or some sort of collateral other then the policy itself as recourse to the funder should the loan and interest not be paid back. Most recourse financing programs are carrier approved, or the insurance company has seen the financing documents and approve of the financing. The lender has demonstrated that the client has put up sufficient collateral to offset the loan.
In non-recourse financing the only collateral the insured needs to put up to qualify for the loan is the policy itself. Non Recourse premium funding came about in the early 2000’s with deals such as Coventry’s La Salle program. Back in the early days of non-recourse financing the carrier’s encouraged their agents to utilize these programs to sell more policies. Now however, none of the existing non-recourse premium financing programs is approved by the carriers.
Both types of premium finance programs work the same way. The client, age 65 or older, takes out an insurance policy on their life for usually $1 million or more. Once the policy is issued the client will borrow the money to pay the premiums for a set amount of time, known as the loan term. Once the loan term has ended, the client has three options. Should they have a dramatic change in health the client can pay back the loan plus the set interest rate and retain all rights to the policy. If the client has maintained their health over the loan term and decides they no longer need or want the policy they can sell it in a life settlement transaction. With the proceeds of the sale, the insured will pay back the loan amount plus interest and any amount they receive over that amount is theirs to keep.
Should the client no longer want to keep the coverage and there is no market for the policy the bank or hedge fund that made the loan has different options. If the financing was non-recourse, the ownership of the policy reverts to the funder and the client walks away from the deal with nothing but no-cost high value insurance for the life of the loan. If the financing option is recourse the funder has the right to exercise the letter of credit or collateral the client put up in order to secure the loan. However, there are no reported cases to date of the funder in a recourse financing transaction exercising the letter of credit or collateral at the end of the loan term. The funder has always taken ownership of the policy, as in a non-recourse financing program.
Premium Financing is wonderful financial option for high net worth seniors who are cash poor and asset rich to take out high valued policies on their life for estate planning or wealth transfer purpose. Due to the increased wealth of aging baby boomers, premium financing is the fastest growing sector of the secondary insurance market.
Where Can I Get More Information?
If you wish to learn more about premium financing for life insurance visit Premium Finance Analyst.
