Frequently Asked Questions – Consumer Advisors

Accelerated death benefits are paid by an insurance company on an existing policy. It is an insurance policy provision that lets you collect part of your death benefit before you die. If you have a terminal illness, the policy advances you a specified part of your death benefit to pay medical bills or other expenses, then the amount is subtracted from the death benefit your beneficiary receives.

*Consumer Tips:

  • While some older policies may not grant an accelerated death benefit in the terms of the life insurance contract, many insurance companies are making this option available to their policyholders. You should check with your insurance agent or company to find out if this option is available.
  • If you accept an accelerated death benefit payment, you may become ineligible for Medicaid or other governmental benefits and the benefits may be taxable. You should consult with your tax and/or legal advisor to determine whether or not this may be the case in your individual situation prior to entering into any financial agreement.

Life settlements are an attractive and viable asset class for long term institutional portfolios. According to Conning Research & Consulting, life settlements are attractive to Institutional Investors for two main reasons. First, the asset class has a low correlation to fixed-income and equity securities. Second, life settlements still offer institutional investors the potential to generate a competitive return.

New investment sources, like pension plans, are entering the market. The long-term nature of life settlements and the very favorable returns compared to traditional investments are attracting the attention of pension fund managers. The typical investors in life settlement portfolios are sophisticated entities such as banks, insurance companies, pension funds and hedge funds.

LISA hosts events to educate institutional investors—state and municipal pension fund managers, among others—that securitized life settlements are safe, non-correlating assets that should be included in a well-diversified portfolio allocation.

Life settlements can have high transaction costs. The commissions paid by life settlement companies to life settlement brokers and other financial professionals involved in the transaction can be substantial. Ask your broker or other financial adviser what they are being compensated for their role in the transaction and how their compensation is being calculated. Also inquire about what other parties are receiving commissions. If someone recommends a particular life settlement to you, find out what they are being paid, and by whom.

It is important to always seek professional advice or consult with a member of LISA to understand how state regulations define a viatical or life settlement contract. Certain transactions involving the use of cash value as collateral for a loan or transfer of ownership to a third party with an insurable interest do not involve settlement contracts and do not require compliance with the various settlement regulations. Other transactions do involve settlements. Therefore, understanding the definition of a life settlement contract is critical to understanding when the life settlement regulations apply.

There are several situations that are not treated as settlements. The following are not considered a settlement under state insurance regulations:
• A loan from an insurer under the terms of the life insurance policy (e.g., a policy loan)
• A loan from a third party where the policy’s cash value is used as collateral (collateral assignment)
• A beneficiary designation without a transfer of value
• A beneficiary designation of someone with an insurable interest in the insured

The life insurance settlement industry takes privacy issues very seriously. In most cases, the identity of the insured person or their financial or medical information may not be disclosed unless it:

  • is necessary to effect a life settlement contract between the seller and a life settlement provider and the seller and the insured have provided prior written consent to the disclosure;
  • is provided in response to an investigation or examination by the commissioner or another governmental office or agency;
  • is a term or condition to the transfer of a policy by one life settlement provider to another life settlement provider;
  • is necessary to permit a financing entity, related provider trust or special purpose entity to finance the purchase of policies by a settlement provider and the seller and insured have prior written consent to the disclosure;
  • is necessary to allow the life settlement provider or its authorized representative to make contacts for the purpose of determining health status; or
  • is required to purchase stop-loss coverage.

(Source: National Underwriter Company, Tools & Techniques of Life Settlement Planning by Stephan R. Leimberg; Caleb J Callahan; Brian T. Casey; James Magner; Barry Reed; Lawrence J. Rybka; Paul A. Siegert)

Life expectancy firms calculate how long you are going to live based on age, gender, tobacco use, medical condition and medical history of an individual compared against a group of individuals sharing similar characteristics – otherwise known as a mortality table. The average life expectancy is then assigned to an individual. Life expectancy firms make their calculations and determinations based on an individual specific situation. As part of their calculation, up-to-date medical records are required.

Most life settlement transactions take, on average, from four to five months to complete.

Life settlement transactions are complex and require cooperation of a number of entities. Some entities have statutory limitations on the amount of time to respond to certain requests during the transfer process; therefore, delaying the transaction. It is always recommended to speak with your insurance agent, professional advisor or a life settlement broker or provider before beginning the life settlement process, especially if your policy is approaching lapsation or a premium payment is quickly forthcoming. Options may be available to keep the policy in force while you weigh your options.

As with any financial planning strategy, life settlements are not suited for every individual situation. Although states increasingly require that a life settlement should be disclosed as an option in all cases where lapsing the policy is being considered, there can be certain downsides to selling any life insurance policy.

The most significant consequence is that the beneficiaries of the originally issued life insurance policy are no longer afforded the death benefit of the policy when the insured passes away. If family dynamics are involved and a change of the beneficiary will trigger emotional or financial conflict, that fallout should be carefully weighed before entering into a life settlement. Depending on how long the insured survives, it’s possible that a policy may be sold for substantially less than what it would have paid out  had the owner simply held onto it for a while longer. Should the insured pass within a short time of the sale of the policy, there may be some anxiety over the “missed opportunity” to benefit from the full death benefit by the former beneficiaries.

There are also potential tax implications attached to the sale of a life insurance policy. IRS Revenue Ruling 2009-13 specifies the possible tax consequences of selling a life insurance policy as a life settlement. Anyone selling a policy should seek a tax and legal opinion about the IRS Regulations in order to assess whether this is a consideration that would impact the financial benefit of a life settlement.

In addition, proceeds from the sale of a life insurance policy may be subject to claims of creditors, should such a circumstance be present. For individuals trying to manage a prior bankruptcy or other debt resolution issue, this should be considered before proceeding with a life settlement.

Finally, since life insurance policies are considered to be private property that can be bought and sold, personal information attached to a policy will be held by a third party after the transaction is completed. That means the insured individual’s name and contact information will be made available to the new owners of the policy, who will track the insured person’s health status from time to time. This is another factor that should be considered by anyone exploring a possible life settlement.

For more than two decades, LISA — the oldest and largest trade organization in the life settlement market — has brought consumers around the world education and access to market participants who can facilitate the sale of a life insurance policy, translating to billions of dollars in additional value.  LISA was established in 1994 and has played a key role in developing legislation and regulations as the foundation for an open, transparent and competitive market for the transaction of life settlements.

LISA members are held to the highest ethical standards in business practices. They also pledge to improve public information and awareness, leading to a healthy industry, strong individual businesses and better service to consumers. All members are subject to a rigorous vetting process prior to acceptance. LISA members must review and accept both the LISA Bylaws and the LISA Code of Ethics.

A viatical settlement is a contractual agreement to provide a life insurance policy holder with immediate cash in exchange for the sale and transfer of life insurance policy ownership rights.

A life settlement is different from a viatical settlement in that the individual insured on the policy has a longer life expectancy. In a viatical settlement, the life expectancy of the insured is generally 24 months or less.

Consumer tips:

  • Some states do not distinguish the difference in terminology of a life settlement and viatical settlement. It is always best to speak with a member of the Life Insurance Settlement Association to understand how regulation, tax laws and how the transaction requirements differ from state to state.
  • It’s important for consumers to understand the differences between viatical settlements and accelerated death benefits.

Life insurance has been a core part of personal financial planning since the 1800s, but many financial advisors and other professionals in the industry are unaware that a senior’s life insurance policy is personal property in every legal sense. The legal basis for life settlements as a legitimate option for life insurance owners may be found in the Grigsby v. Russell decision from the U.S. Supreme Court in 1911, where it ruled that life insurance is just like any other private property you own and can therefore be sold.

A life settlement is the sale of your client’s life insurance policy to a third-party institutional investor. In a life settlement, the policy’s owner transfers ownership of the policy in exchange for an immediate cash payment.

Our research shows that Americans who are aged 65 or older leave approximately $112 billion in benefits on the table each year by lapsing or surrendering their life insurance policies. A life settlement is one option for capturing some of those benefits rather than forfeiting them back to the insurance companies.

According to a 2010 U.S. Government Accountability Office (U.S. GAO) study, U.S. policy owners received $5.62 billion more than the policy cash surrender values from life settlements from 2006-2009. According to Conning & Co., an independent analyst firm, the annual volume of life settlement transactions will average approximately $3 billion per year over the next decade. This is an established and growing industry.

Candidates for life settlements are typically 70 or older, with a life insurance policy that has a “face value” (death benefit) of more than $100,000. However, if your client has an insurance policy with a death benefit of less than $100,000, it’s still worthwhile to contact a LISA member and discuss potential options. A settlement is only possible when the policy’s face value exceeds the cash surrender value.

There are a variety of life circumstances that may cause one of your clients to be interested in exploring the life settlement option, such as the following:

* The life insurance policy is no longer needed or wanted

* Premium payments have become unaffordable

* Considering surrender or lapse of the policy

* Change in estate planning needs

* Change in financial circumstances

* Changes in life circumstances (such as divorce or sale of a business)

For most financial advisors, your primary responsibility is simply an ethical choice to inform your senior clients about the life settlement option as an alternative to lapsing or surrendering a life insurance policy. However, six states — Kentucky, Maine, New Hampshire, Oregon, Washington and Wisconsin — have already passed various versions of a life insurance disclosure requirement, legally mandating that insurance carriers notify seniors in certain circumstances of the alternatives to lapse or surrender of their policy (e.g., accelerated death benefit or available riders, assignment of policy as a gift, life settlement, policy replacement, etc.). The “seniors’ right to know” movement is growing. Interestingly, studies show that nearly 90% of seniors who lapsed or surrendered their policies back to insurance carriers would have considered selling the policy if they were aware that possibility existed.

A recent study on life settlements reported that the average life settlement value is 20 percent of the life insurance policy face value. Compare this value with the average cash surrender value paid out by insurance companies, which amounts to only 10 percent of a life insurance policy’s death benefit.

By selling your client’s life insurance policy through a “secondary market” to another party, he/she can benefit from their life insurance today and use that cash for their immediate needs. Life settlements generate liquidity and provide your client with more cash to put to work in his/her portfolio.

The primary downside is that once you transfer ownership of your policy to an investor, your client’s beneficiaries no longer have any rights to the death benefit when the insured person passes away (although some LISA-member companies may be able to obtain a settlement for your client that allows him/her to retain some of the death benefit from the policy). Also, depending on the client’s individual situation, there may be tax consequences to a life settlement transaction.

The best way to explore whether a life settlement is a good option for one of your clients is to contact to contact a licensed life settlement professional who is a member of the Life Insurance Settlement Association (LISA) to begin the process.
To find a LISA member click here.

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