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Life Settlements Explained
The definition: “A Life Settlement is the legal sale of an in-force, life insurance policy that is owned by a senior usually over the age of 65 years and sold to a third-party investor for a lump sum, normally exceeding the surrender value but less than the death benefit”.
The person selling the policy is known as a the Policyowner. This is not to be confused with a ‘Viator’ for Viatical Settlement contract (more on this below). The buyer of the Life Insurance policy from the Policyowner is called the Investor. The Investor is also known as the ‘Provider’ who has met the legal requirements to purchase life insurance policies (known as a Longevity Asset and/or Security). A Life Settlement Broker (like Bridge) has a fiduciary responsibility to the client’s best interest and/or to negotiate the best offers among buyers. The Life Settlement Provider, makes a cash offer to purchase the Life Insurance policy from the Policyowner usually above surrender value but less than the death benefit, as previously mentioned. If the offer is accepted and the is policy sold, the policy becomes legal property of the Provider and the former Policyowner collects the lump sum to spend however they see fit. The Provider will continue to make premium payments on behalf of the Policyowner and will collect the benefit proceeds upon the death of the Insured. Although Policyowners may sell a portion of their policy and retain some death benefit, usually the beneficiaries do not receive any portion of death benefit after a Life Settlement agreement. A Policyowner may be given some tax benefits on the proceeds but be sure should talk with a tax professional. We will discuss some life settlement tax information below to but this is NOT advice!
A Life Insurance policy is considered ‘real property’ (like a house, or a car) which can be bought and sold. Although most do not think of a life insurance policy in this way, they should, considering the potential value it may hold. There is no doubt, opposition from Life Insurance companies in regard to the secondary market but considering that Life Insurance companies have been the only, sole ‘buyer’ of their own policies, it levels the playing field for Policyowner by giving them options. In general, people buy Life Insurance for different reasons at different stages of life. Often, the initial intent of the policy changes over time (ex: to cover debt) and matures. In the case of Life Settlements, there could be a few reasons why some one one may sell their life insurance policy. They may find they no longer need the policy anymore or that the premiums are skyrocketing! Think of the surmounting medical costs some folks face when dealing with an unfortunate, critical illness and the windfall of relief offered by a Settlement to help with the costs. Conversely, since folks are living longer, a Life Settlement could supplement their retirement. It is not uncommon for Settlement offers to compare to that of selling a home! Even policies with Accelerated Death Benefits (ADB) may not offer the value of a Life Settlement but sometimes they can (if your policy offers ADB, we suggest you talk with your Life Insurance Agent or contact us to review your policy). As you can see, Life Settlements do solve a real need for people and can benefit some seniors who choose to sell their policy for more than what the life insurance company will offer. Let’s go over a basic example of a Life Settlement deal.
Life Settlement Examples
Here is an example of a Life Settlement: A male age 74 and female age 73 had purchased a $1.5 survivorship UL policy to pay estate taxes. With the dramatic increase in the estate tax exclusion, they no longer had a federal estate tax liability and this policy was no longer necessary. Both had some health issues and they were able to sell the policy for $400,000.
Benefits of Life Settlements
Some general benefits of Life Settlement may include;
- Pay Medical Bills – Peace of Mind.
- Pay Other Liabilities – Remove Financial Worry.
- Amplify Retirement – Relax and Reflect.
- Enjoy Final Days – Make Memories.
- Investing & Giving – Spread Joy.
Life Settlements Regulation
In this section we will go over the general regulations of Life Settlements. As of current, 43 out of 50 states have some sort of regulation around the market of Life and Viatical Settlements. Although the regulation is not universal, the industry has started to grow legs thanks to state legislators and the offices of Financial & Insurance Regulation. Associations like, the National Association of Insurance Commissioners (NAIC) and The National Council of Insurance Legislators (NCOIL) draft Model Acts help define the market and make it easier to integrate policy. Other organizations such as Life Insurance Settlement Association (LISA), National Association of Settlement Purchasers (NASP) and the Institutional Life Markets Association, Inc. (ILMA) also work to help protect the industry, investors and ultimately, the people from deceptive practices like Stranger-Originated Life Insurance (STOLI) which is a fraudulent practice of defrauding Life Insurance Companies and preying on the innocence of laypeople. FINRA issued this page, Seniors Beware but this article hasn’t been updated since 2009 and so much has been regulated since then! Although STOLI has been associated with the industry, the two are not the same. The industry has unfortunately been tethered to this negative stigma, in part due to it being unregulated with a lack of institutional capital and life insurance lobbyist to name a few. As of recent, a real shift has taken place to offer more consumer education and transparency around Life Settlements. For example, some states now require Life Insurance companies to disclose a Life Settlement option. The Life Settlement industry is not a newborn, laws enacted as early as 1855, and more notably, the 1911, U.S. Supreme Court case, Grigsby v. Russell, finding in favor of secondary policy sales. However, it wasn’t until the 1980’s AIDS crisis, that mainstream use of case law provisions took hold due to the predictability of life expectancies. We go into more detail about the history of Life Settlements at the end this page. The purpose of this section is to only provide a general understanding of the past and current regulations surrounding Life Settlements. Following our scenario above, we will define the roles in a Life Settlement transaction starting with the Policyowner.
The Here is a current map of U.S. state regulation.
The Policyowner for Life Settlements
Let’s revisit again, the definition of a Life Settlement, ‘…the legal sale of an in-force, life insurance policy that is owned by a senior usually over the age of 65 years and sold to a third-party investor for a lump sum, normally exceeding the surrender value but less than the death benefit’. An important aspect of Life Settlements is that there is an “age restriction” unlike a Viatical Settlement that is reserved for any one at any age with a critical or chronic illness who owns an in-force, Life Insurance policy. A Life Settlement age restriction is a ‘minimum condition’ but not the sole deciding factor for Providers because of other considerations like; underwriting, policy type and the health and/or life expectancy of the insured. Although a change of health can trigger a favorable settlement, it is not uncommon for some healthy seniors to sell their life insurance policy too. If you have questions about a Viatical Settlements review the Viatical Settlement FAQs page. Moreover, here is a basic online for Life Settlement eligibility;
Life Settlement Eligibility
Any person may be eligible to sell a life insurance policy under a Life Settlement if the following conditions are met;
- They are 65 years and older in the U.S. AND
- is the Policyowner OF
- an in-force, Life Insurance contract that is typically above $150,000 or more.
What else is required of the Policyowner and how is the health verified?. In short, the Policyowner provides a signed authorization to contact and obtain medical records (under HIPPA authorization) from each of their associated doctors called a ‘Physicians Statement’ which verifies the seller’s current health status. In the section below titled; “Life Settlement Underwriting Guidelines”, we explain how a Life Settlement works and the approval process through a series of documents, disclosures and verifications.
In addition to medical records, the Life Settlement Broker and/or Settlement Provider will request the Policyowner’s medication and/or formulary which is a weighted factor when determining the sale of a Life Insurance policy. Since every person’s situation and policy type is unique, it is important to get a free, Life Settlement policy appraisal. Ask Bridge for more information!
Now that you have a better understanding of the Policyowner’s role within a Life Settlement transaction, let’s switch gears to review the policy itself.
The Life Insurance Policy for Life Settlements
Moreover, the definition further states; ‘…the legal sale of an in-force, life insurance policy’. You might be thinking, what does in-force mean? Let’s expound on this definition.
Starting at the inception, before a life insurance policy is ‘born into existence’ there needs to be this tangible thing called, ‘insurable interest’ think of it like the consideration in a typical sale (the thing you’re buying has some intrinsic value associated with it, right? Right!). Insurable interest are the means by which a life insurance contract is considered valid. Simply, this means that the person purchasing the policy is buying it for ‘legit purposes’ for themselves. An example of valid insurable interest would be buying life insurance on an individual’s own life or a spouse’s life because it is considered a vested interest (not for profiteering). Unlike buying a life insurance policy on your next door neighbor which the industry calls, a “stranger”. Most life contracts contain a clause known as a, “contestability period” which is that window of opportunity where courts will recognize a life insurance carrier’s attempt to appeal the validity of the policy. Put differently, this allows the life insurance carrier to contest or “challenge” if the Policyowner has a real insurable interest. Not all states regulate contestability periods. Generally, most contestability periods last for at least 2 years or more and some contracts exclude them altogether. What does your policy say about contestability? Without a contestability period, life insurance companies could ‘have their cake and eat it too’. Some Life Insurance companies have decided to keep all the premium payments and then evaded the death benefit in court under contestability claims. Here are some more recent litigations against life insurance companies;
- John Hancock Settles Life Insurance Class Action for $91M (2018)
- Phoenix Pays $48.5 Million To Settle Class-Action Suits (2015)
- AXA 70% COI Increases Lawsuit
Furthermore, the “legal sale” aspect of the definition, encompasses more than just the validity of the life insurance policy itself. As mentioned previously, a majority of states do regulate Life Settlement commerce and capitulate between financial securities and insurance governance similar to variable annuities. Interestingly, a sold life insurance policy is considered a security and/or a principal asset class which has garnered the attention of institutional investment firms and the respect of financial scholars alike (Wharton). Now that we deconstructed the legal properties of our definition, let’s review the ‘in-force’ aspect of the life insurance policy.
When a policy is said to be, “in-force” it basically means it is currently ‘active or paid’ and in good standing (paid on-time or paid up). The policy should not be in a state of lapse or in a grace period because the Life Settlement process can take time (months). However, it is not uncommon for Life Settlement Broker to provide general quotes within a 24-hour period or up-to one (1) week+ time periods in some cases.
Health Classification for Life Settlements
Since we are on the topic of premium payments, a good buying signal for the Providers who purchase the life insurance policy is the insured’s initial underwritten health class because the better the health, the lower the payments. Remember, investors are paying for the policy premiums after it’s been sold up until the death of the insured. It doesn’t matter an individual’s current health status, it’s what their health was when they purchased the policy that may count. However, that doesn’t mean Providers will turn down standard health classes because each insurance policy is unique. Here are some examples of health classes; Preferred Plus, Preferred, Standard Plus, and Standard. What health class does your life insurance policy say you are? Also, Sub-standard is not a typical health classification rather Standard is denoted within a table rating system of alphanumerics.
Life Insurance Conversions Options for Life Settlements
An important element to keep watch of on a life insurance policy is the conversion date which outlines the ability to convert the policy from say, a term to a whole life product. Conversions can be based on policy anniversary dates, a number of active-years the policy has been in-force or other time factors. Sadly, many folks miss out on the conversion window of opportunity because clients find it hard to read or understand Life Insurance contracts, or the Agent and/or Life Insurance Company goes incognito (leaves or gets acquired). Missing this opportunity could cost you and it’s highly advisable that you reach out to Bridge to review your policy to get an unbiased review. Part of the problem of poor policy management on behalf of Life Insurance companies has to do with flawed expectancies and decades of paper contracts. While digital policies will be easier to manage in the future, older paper contracts are more difficult to resurrect. People have to be very careful they don’t “give way” to the pressure of some life insurance companies sending what may seem like a ransom letter to change their core policy or take an increase in premium because of an expired rider. We have seen this happen first hand! What happened was the client signed the new policy and at that point, it was too late to offer a life settlement. We are often asked, does a term life insurance policy qualify for a Life Settlement? Let’s go over the common policies that can be sold to Providers.
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The common types of policies that sold for a Life Settlement include (but are not limited too);
- Term Life Policies
- Whole Life Policies
- Universal Life Policies
- Universal Life Policies
- Term Life Insurance
- Variable Life Insurance
- Variable Universal Life Insurance
- Indexed Whole Life Insurance
- Group & Survivorship Life Insurance
- Key Person Life Insurance
No matter what kind of policy you own, don’t hesitate to get your policy appraised because it doesn’t take much time to get a free review with Bridge. Which leads us to our next important factor of the life insurance policy…the face amount.
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Face Amounts for Life Settlements
The face amount is one of the top value drivers for selling a life insurance policy because that is one of the main reasons why investors are buying the policy. It’s not really in a Provider’s best interest to buy a life policy with a face value of less than $100,000 because of the overhead costs. Typically, Providers are looking for face amounts above $150,000 and more. However, it really depends on the policy type and if it can be converted and the life expectancy/health of the insured. For example, if a person has less than 6 months to live with a favorable policy and smaller face amount and upcoming conversion option, it may very well sell quickly.
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Cash Value Policies for Life Settlements
Policies with cash value are considered whole life policies. The cash value is taken into consideration when purchasing a life insurance policy but it’s not the most important factor. The cash value is owed premium back to the insured. The goal of Life Settlements is to offer more than just the cash value of the policy and more than the surrender value. Most whole life policies return the premium paid into the policy as a living benefit or not. Sometimes the cash value is too high to be sold for a Life Settlement. In that case, selling the policy back to the insurance company maybe your best option.
In-Force Illustration for Life Settlements
Since we are still on the topic of the policy, one of the documents needed with a Life Settlement Application is a In-Force Life Insurance Illustration. This is a document that comes direct from the insurance carrier and projects the minimum costs of insurance to prevent the life insurance policy from lapsing. It should show the minimum level premiums to maintain the death benefit through maturity, solving for $1000 of account value to age 100 (maturity).
At this point, we have gone into great detail about the important factors of the life insurance policy for purposes of this page. Although, there are nuances and other factors that play into a settlement, check back on our website for future content and Life Settlement policy examples. So far, we have explained the role of the Policyowner and the policy but what about the buyer? Who are Life Settlement Brokers & Providers?
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Life Settlement Brokers
Since there is not a whole lot we can say about Life Settlement Brokers, we will review their role first before the Providers for brevity. Bridge is a Life Settlement Broker which means we mediate between Policyowners and Providers. In essence, we put buyers and sellers together for a commission. Settlement Brokers are important because they protect the Policyowner’s interest. Life Settlement Brokers have a legal obligation to act in the best interest of the Policyowner, unlike the Provider who DOES NOT have a legal obligation to act in the Policyowner’s best interest. This legal obligation is called a “Fiduciary Duty”. As a licensed, Life Settlement Broker, one of the requirements is two-fold,
- A state active, Life Insurance License AND
- A Viatical and/or Life Settlement Brokers License.
As a Life Settlement Broker, we run all the quotes. We do all the upfront work of gathering policy information, documenting signatures, health questionnaires, managing expectations, facilitating on behalf of the Provider and ultimately negotiating the best offers on behalf of our clients. A good Life Settlement Broker will go above and beyond to earn your business! Bridge compares all the Best Life Settlement Companies saving our clients time, money and energy! Don’t go at it alone, have an expert in your corner and don’t settle for less!
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Life Settlement Providers
Life Settlement Providers are on the “buy side” of the settlement transaction. In the early years, these were smaller pools of individual investors but nowadays, larger institutional investors have entered the market of longevity assets. These licensed, Life Settlement Investors hold a large portfolio of life insurance policies to the point that no individual one policy affects the overall Assets Under Management (AUM). Life Settlement Providers may differ in the capability of purchasable policies. Since not all states regulate the industry, some Providers are not required to have a securities license! So if you do decide to work with a Provider without a Life Broker, be careful and ask questions to be sure the Provider has a securities license. Now that we have identified the main parties involved in a Life Settlement, let’s turn our focus to a typical sample case transaction for clarity.
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Top Best Life Settlement Providers
Here is a list of the top Life Settlement Providers. Bridge compares all these providers to save you time and negotiate the best offers!
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Other Parties involved in a Life Settlement
Some of the time, selling life insurance can be a family affair. Families can be very concerned for the health and well-being of the insured especially if a change in health occurs. The Policyowner’s beneficiaries are also affected in the process and should consider all the options available. Additionally, a Policyowners CPA, Attorney, Financial Advisor (FA), Fiduciary, Trustee, Medical Professionals, and the Life Insurance Company may be involved but it’s not required since it’s the Policy Owner’s will. What about the proceeds of the Life Settlement? Let’s go over the lump sum benefits offered to the seller when the policy is finally sold.
Proceeds of a Viatical Settlement
The most common questions people ask who are interested in a Viatical Settlement are; how much can I sell my life insurance policy for? How much is my life insurance policy worth? These are great questions to ask and although you may get a estimate in a short period of time, it’s not until the insured has been fully underwritten to determine the true offer, minus costs (taxes & fees). According to LISA, The amount received from selling a policy will always be greater than the cash surrender value and less than the death benefit value.” It’s not uncommon for an eligible policy to pay between 5% to 50% + or more of the policy face amount. For example, a $200,000 eligible policy could pay between $50,000 to $100,000. The proceeds may be used by the Viator however they see fit. Talk to a Tax Professional to see if you qualify for any deductions. More on tax later!
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Viatical Settlement Alternatives
Are there any alternatives to a Viatical Settlement? The answer is yes, there are a few alternatives although not all life insurance polices may qualify. Here are some Viatical Settlement alternatives;
Another example of an alternative to a Viatical Settlement is called a policy loan. Most states require a Policy Loan Provision for cash value, whole life insurance policies. Typically, within prescribed limits, policyholders can borrow against the cash values of their policies if they choose. Although called a loan, it’s not your typical loan because they cannot be “called” by the company and repayment subjective. A policy loan is actually an “advance” of the death benefit by which any unpaid principal and/or accrued interest is deducted from the proceeds upon the death of the insured. Which leads us to our next alternative to a viatical settlement which is a cash surrender.
Accelerated Death Benefits
Accelerated death benefits (ADB) offers another alternative to a Viatical Settlement. An ADB is a policy provision that allows the insured to take a portion of the death benefit if the insured qualifies with a life-threating illness or severe disability. Accelerated Death benefits may incur an interest charge. The remaining balance (minus loans) may be payable to the beneficiary. The payout can be in a lump sum and unlike a Viatical, the payout may also be paid in installments. Here is some additional information about Accelerated Death Benefits considering they are a contender to a Viatical Settlement.
Example of Accelerated Death Benefits
Here is a simplified example of Accelerated Death Benefits (ADB) for a terminally ill insured with $250,000 policy. If the ADB is 75%, the benefit payable would be $187,500 with a remainder of $62,500 available to the beneficiary upon the death of the insured.
Detailed example: $600,000 policy. A 50% accelerated death benefit claim or $300,000. The insurance carrier will charge a fee for opportunity cost and expenses out of the 50% ADB. This means out of the $300,000, minus fees, with a new payout of 70% ADB amount, or $210,000. The insurance company keeps $90,000. You will also be charged a lower premium on the remaining policy balance of $300,000. The remaining balance could possibly be sold through a Viatical Settlement as well. Contact Bridge for more information.
Accelerated Death Benefits vs. Viatical Settlements
What is the difference between Accelerated Death Benefits (ADB) and Viatical Settlements? Here is a brief, comparison;
Accelerated Death Benefits
ADB is a provision in the life insurance policy that allows the beneficiary to receive an upfront cash payout from the life insurance company, while still retaining a death benefit. The retained death benefit means that the policyowner will continue to pay premiums on the reduced amount. Typically, the payout of a ADB is more than a Viatical Settlement.
Conversly, a Viatical Settlement would make more sense to the policyowner if the policy did not have ADBs in their policy or if the policyowner did not want to continue paying premiums or no longer needed the policy.
As you can see, ADB Provisions are somewhat similar to Viatical Settlements and if available may be a better option for the client.
Cash surrender can also be an alternative to a Viatical Settlement. This option is called a non-forfeiture option which means, by law, the policy owner is entitled to the accrued cash value of the policies in an immediate cash payment. As the name implies, the policy owner “surrenders the policy” back to the life insurance company. If you own a cash value policies, the contract should display the table values under “Cash or Loan Value”. Normally, this option is available within three years and the proceeds could take up to six months after a request of surrender. Talk with the carrier for details.
A Life Settlement could be another alternative to a Viatical Settlement if the insured qualifies. Life Settlements are similar to Viatical Settlements since both services offer the sale of a life insurance policy. To qualify for a Life Settlement, the insured must be above the age of 65 years old with a change of health. Conversely, some policies may not even need a change of health! If you have more questions, check out the Life Settlements FAQ Page
At this point, we have reviewed all the various alternatives of Viatical Settlements that are offered to policyowners. In the next section, we will discuss the differences between a Viatical and Life Settlements.
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A Life Settlement vs. Viatical Settlement
Viatical and Life Settlements are similar in that, both are the sale of a life insurance policy to a Provider. However, the underwriting guidelines are very different. For the purposes of this page, we will only provide a quick overview of the differences on this topic since we already wrote a page titled, Viatical Settlements vs. Life Settlements. Meanwhile, here is a simple comparison between the two;
- Age restriction over 65yrs.
- No illness requirement
- Taxed differently
- No age restriction
- Possibly taxed deductible
- Must be certifed as Critically or Chronically Ill
This should give you a good snapshot of the differences between a Viatical and Life Settlement for more information visit the page referenced above or contact Bridge with any questions you may have!
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Proceeds of a Life Settlement
The most common questions people ask who are interested in a Life Settlement are; how much can I sell my life insurance policy for? Basically, how much is my life insurance policy worth in a secondary market? This is a great question to ask and although you may get an estimate in a short period of time, it’s not until the insured has been fully underwritten to determine the true offer, minus costs (taxes & fees). According to LISA, “The amount received from selling a policy will always be greater than the cash surrender value and less than the death benefit value.” It’s not uncommon for an eligible policy to pay between 5% to 50%+ or more of the policy Face Amount. For example, a $200,000 eligible policy could pay between $50,000 to $100,000. The proceeds may be used by the Policyowner however they see fit. We suggest talking with a tax professional to see if you qualify for any deductions. More on tax later!
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Life Settlement Alternatives
Are there any alternatives to a Life Settlement? The answer is yes, there are a few alternatives although not all life insurance policies may qualify. Here are some Life Settlement alternatives;
Another example of an alternative to a Life Settlement is called a policy loan. Most states require a Policy Loan Provision for cash value, whole life insurance policies. Typically, within prescribed limits, Policyowners can borrow against the cash values of their policy(s) if they choose. Although called a loan, it’s not your typical loan because they cannot be “called” by the company and repayment is subjective. A policy loan is actually an “advance” of the death benefit by which any unpaid principal and/or accrued interest is deducted from the proceeds upon the death of the insured. Which leads us to our next alternative to a Life Settlement which is a cash surrender.
Cash surrender can also be an alternative to a Life Settlement. This option is called a non-forfeiture option which means, by law, the policy owner is entitled to the accrued cash value of the policies in an immediate cash payment. As the name implies, the policy owner “surrenders the policy” back to the same life insurance company. If you own a cash value policies, the contract should display the table values under “Cash or Loan Value”. Normally, this option is available within three years and the proceeds could take up to six months after a request of surrender. Talk to the carrier for more details.
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Accelerated Death Benefits
Accelerated death benefits (ADB) offer another alternative to Life Settlements. An ADB is a policy provision that allows the insured to take a portion of the death benefit if the insured qualifies with a life-threating illness or severe disability. Accelerated Death benefits may incur an interest charge. The remaining balance (minus loans) may be payable to the beneficiary. The payout can be in a lump sum and unlike a Viatical, the payout may also be paid in installments. Here is some additional information about Accelerated Death Benefits considering they are a contender to a Viatical Settlement not so much with Life Settlements unless over the age of 65 years old.
Example of Accelerated Death Benefits
Here is a simplified example of Accelerated Death Benefits (ADB) for a terminally ill insured with a $250,000 policy. If the ADB is 75%, the benefit payable would be $187,500 with a remainder of $62,500 available to the beneficiary upon the death of the insured.
Detailed example: $600,000 policy. A 50% accelerated death benefit claim or $300,000. The insurance carrier will charge a fee for opportunity costs and expenses out of the 50% ADB. This means out of the $300,000, minus fees, with a new payout of 70% ADB amount, or $210,000. The insurance company keeps $90,000. You will also be charged a lower premium on the remaining policy balance of $300,000. The remaining balance could possibly be sold through a Viatical Settlement as well. Contact Bridge for more information. For more information visit the Accelerated Death Benefits vs. Viatical Settlements section.
At this point, we have reviewed all the various alternatives of Life Settlements that are offered to Policyowners. In the next section, we will discuss the differences between Viatical and Life Settlements.
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A Life Settlement vs. Viatical Settlements
Life and Viatical Settlements are similar in that both are the sale of a life insurance policy to a Provider. However, the underwriting guidelines are very different. For the purposes of this page, we will only provide an overview of the differences as this topic has its own dedicated page titled, Viatical Settlements vs. Life Settlements. Meanwhile, here is a simple comparison between the two;
- Age restriction over 65yrs.
- No illness requirement
- Taxed differently
- No age restriction
- Possibly taxed deductible
- Must be certified as Critically or Chronically Ill
Now that you know the differences between a Viatical Settlement and Life Settlements, let’s review the Life Settlement Underwriting Guidelines!
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Life Settlement Underwriting Guidelines
So far, we have provided definitions without going into much detail about how a Life Settlement works from an underwriting perspective. The Life Settlement underwriting guidelines can be a complex topic and too broad to define every case. As we mentioned above, a Policyowner needs to be over the age of 65 years. Here are some of the documents, disclosures, and verifications needed to qualify for a Life Settlement.
Life Settlement Application
Before an application begins, a Life Settlement Broker and/or Life Settlement Provider will do an initial screening of the insured, health status and the Life Insurance policy. If the case looks viable, a Life Settlement Application is provided which contains a series of documents that normally include all of the following;
Personal Identifiable Information (PII)
PPI includes name, phone number, address, DOB and similar information to verify your identity and contact you.
HIPPA Consent Form
As previously mentioned, in order to collect health sensitive data, Life Settlement Providers need a signed HIPPA consent form. What is a HIPPA consent form? HIPAA stands for the Health Insurance Portability and Accountability Act which is a US legislation passed in 1996 that mandates data privacy and security provisions for protecting medical information of the American people. As such, this is a core document needed to underwrite a Life Settlement because it authorizes the ability to review the insureds health history and release medical records from health professionals. Included with the HIPPA, is a general health questionnaire.
A health questionnaire is an overview of Policyowners current health status which, not only includes health conditions but also includes lifestyle questions, medications & contact information for doctors. The Life Insurance Release must also be disclosed.
Life Insurance Release Form
A Life Insurance Release Form allows Life Settlement Brokers or Providers to contact the Life Insurance Carrier to request information on behalf of the Policyowner to obtain an in-force illustration of the premiums to maturity or requesting a copy of the insurance policy. The policy details also play an important part.
Lastly, the Life Settlement Application will include the details of the policy which may or not include the following points;
- Carrier name
- Policy type (term, universal life)
- Face value
- Cash value
- Conversion date
- Health class
- Current premiums
- Maturity date
- Specific provisions
These are just a few examples of policy details needed to underwrite a Life Settlement. If an application is accepted by a Provider, there will be more underwriting needed as the process can take months to finalize. In the next section, we will review the Life Settlement Process based on milestones.
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The Life Settlement Process
The process of a Life Settlement is like selling a home and buying life insurance all over again because on one hand, there is the sale of “real property” (ie: the life insurance policy) while on the other hand, one is undergoing Medical underwriting to determine health status & life expectancy. Both activities involve weighing all the available information to determine if a Life Settlement is a good option for the Seller. Here is general idea of what’s involved in selling a life insurance policy. *NOTE: The timeline below reflect conservative estimates and is a modified version of LISA Life Settlement Sales Process. Let’s quickly review the parties involved.
Who’s involved in a Life Settlement?
Up to the point, we have identified all the parties involved but it’s worth repeating. The parties often involved in the Life Settlement process may include;
- The Policyowner(s)
- Providers and/or Settlement Brokers
- CPA, Attorney, Trustee (optional)
- Family members (optional)
- Medical Professionals
- The Life Insurance Company
Pre-qualification Discussion (1-2 days)
Normally, a pre-qualification can be completed through a simple, phone call to answer a few standardized questions about health status and the life insurance policy. In some instances, a general quote can be provided within 1-2 business days. Let’s re-review the application process.
Application (1-4 weeks)
Upon pre-approval, a Life Settlement then moves to the Settlement Application phase which includes a more in-depth review of the life insurance policy and health verification as previously explained. To reiterate, some key areas of the application process include;
- Life insurance policy details
- Phone Health Review
- HIPPA Medical Record Consent
- In-force Policy Illustration
- Physician Consent
Afterward, the review and initial underwriting process begins.
Review & Underwriting(1-2 weeks)
After the full Settlement application has been completed, it is then submitted to multiple, Life Settlement Providers to receive any offers. With Bridge, clients save time with a streamlined application process and we submit the application to the best Life Settlement Companies to get the best offers guaranteed! How about the offer?
The Offer (1-2 weeks)
When all the Life Settlement offers are submitted to Bridge, we keep working by negotiating counter-offers and present the final offer status for the life insurance policy. Even after the offers have been accepted, the client still has the choice to accept or deny the Life Settlement offers up to this point. If the offer is accepted, the Settlement Provider initiates the purchase and sale agreement package.
Purchase & Sale Agreement (1 month)
After accepting the best offer, the application then goes into finalizing the Life Settlement transaction. This process varies by each state and is intensive because it requires additional documentation and signatures which include but are not limited to; Change of Ownership & Beneficiary, Letter of Competency, Verification of Coverage & Life Expectancy Reports. The purchasing provider will then review the docs, finalize due diligence and then countersign the package. The funds for the settlement transaction will then be placed in a secured escrow account. The transfer of funds could take longer than cashing the average check.
Transfer of Funds (1 week)
Finally, after the life insurance policy has been successfully verified and transferred to new ownership of the Provider. The Policyowner’s funds are deposited from the escrow account. Once funds have been received, the Life Settlement contract will be successfully completed. The insurance carrier is notified of the change of policy ownership and beneficiary to the new owner, the Life Settlement Provider.
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2019-2020 Life Settlement Tips
Taking on a Life Settlement alone and without a partner is like walking in unknown territory. You need a guide to help navigate you through the process. Bridge is a legal fiduciary who has a plan to help you get the best offers for your life insurance policy. Here are some quick tips for Life Settlements in 2019!
- Make sure your Broker or Provider is licensed (Life & Securities if a Provider) by the state!
- Have your policy handy, request a copy from the carrier along with an in-force illustration.
- Have your medical information handy, with a list of names, address, phone of your doctors.
- Set your expectations low in terms of payout and timeframe (better to be surprised!).
- Ask about fees upfront.
- Talk with family and get tax/legal advice.
I hope these helpful tips about Life Settlements for 2019 will help you make a wise choice and net you the best offer for your life insurance policy! Furthermore, let’s review Life Settlement taxation in the next section.
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Life Settlement Tax Explained
Life Settlements are becoming more favorable, especially with the recent 2018 Federal Tax update, which is the first major update in 30 years! The following are some general cases of tax relief examples to help navigate the discussion surrounding Life Settlements. *This is not tax advice. Please consult your tax professional for more details.
Terminal & Chronic Illness
For Viators, they must have a critical/terminal or chronic illness to qualify. Here is a quick run through of how the tax code may treat Viatical Settlement proceeds;
- Proceeds may be exempt from taxation based upon health condition and life expectancy.
Long Term Care and Life Settlement Taxation
For people who are chronically ill with long term care expenses that could not be covered by insurance, the proceeds of a Life Settlement may be exempt if the following three conditions are met;
- The expenses incurred must be necessary.
- The services must be required
- The services must be prescribed by a health professional within the health care plan.
There are also technical requirements that must be met which include;
- The contract under the viatical settlement must meet certain IRS requirements applied to life insurance contract buyouts, assignments or other arrangements.
- The services must be required
- The services must be prescribed by a health professional within the health care plan.
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Viatical & Life Settlement Deductions
The new tax code further simplifies and reduces taxes by including the Cost of Insurance (COI) premiums when calculating the Cost Basis which was previously excluded.
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Estate Tax and Life Settlement
How does Estate Tax Provisions effect Life Settlements? Some Life Insurance policies included tax planning provisions which helped shield from the transfer of estates taxation after an insured passed away. Since the 2018 tax reform, the estate threshold has doubled eliminating the need for this provision. This means a majority of US citizens are exempt from paying this tax and further voids the reason to keep their existing life insurance policy.
Medical Deductions for Life Settlements
An increase in Medical expense deductions over the new two years improves the landscape for Life Settlements to meet this maximized threshold as more and more medical expenses incur.
As previously mentioned, we recommend the counsel of a tax professional before committing to a Life Settlement contract. As we start to conclude this page, I hope the information thus far has provided you with a good basis of Life Settlements and if you have any questions or corrections, please contact us at [email protected]. In our final points, we will overview the potential risks, the History of Life & Viatical Settlements and then our conclusion.
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Potential Risks of Life Settlements
What are the potential risks for Life Settlements? Although, a majority of risk lies with Providers, there are some risks to consider for consumers who would consider a Life Settlement. Here is a brief list of potential risks;
- Unregulated States (sellers disadvantage).
- Taxation risk (talk to a tax professional).
- May not be able to purchase life insurance again.
- Proceeds could lay claim to creditors.
- You may become ineligible for Medicaid.
The History of Life Settlements
Did you know that selling a life insurance policy has been around for over a century! In fact, it was in 1855, when the New York Court of Appeals ruled in favor of selling a life insurance policy to a third-party. However, the most notable court case was in 1911, Grigsby v. Russell, favoring secondary policy sales and proclaiming, “The law has no universal cynic fear of the temptation opened by a pecuniary benefit accruing upon a death. (Yale, Eli Martin Lazarus, Viatical and Life Settlement Securitization: Risks and Proposed Regulation, 2010)”. Although the law was established, it wasn’t applied until the late 1980’s AIDS crisis. For a majority of victims, death was certain and the cost of medical and health treatment had skyrocketed. Soon thereafter, AIDS victims started accepting money from investors to cover final expenses due to near-certain life expectancies. It was around this time that Viatical Settlements came into public domain.
We get the name ‘Viatical’ from the Latin root ‘Viaticum‘ a Christian word which means “provision (money and/or sustenance) for a journey” as something to sustain the dying person on his last journey or “last rites”.
During the mid-1990’s the Viatical market reached a breaking point as medical advancements in AIDS treatment became more available and investors shifted to senior insureds to what is now called Life Settlements. Just as the Life Settlement industry started to gain steam, the 2008 financial collapse caused investment pools to dry up coupled with flawed medical underwriting. Fast forward to today, Life Settlement markets are growing with a resurgence of institutional investment and demand for policy supply.
The Magna Life Settlements 2018 Industry Report, provides a bird’s eye into the future of Life Settlements with many positive indicators of growth, favorable regulation and a growing demand for seniors who are experiencing increased costs of insurance, medical bills and expended longevity. Now that we have walked through the ins and outs of Life Settlements in-depth, let’s conclude this page with a final overview.
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Life Settlements have been around for over 100 years and this young industry has seen its fair share of ups and downs. However, the legal landscape is shifting in favor as more and more people are see the benefits of Life Settlements. In this article, we reviewed the general definition of a Life Settlements while reviewing the defined parties involved in the Life Settlement transaction. We did an overview of common terms, taxation, policy details and the history of Life Settlements. We hope this article helps readers understand how Life Settlements work and how to generally, navigate the process. We hope you enjoyed our deep dive! If you think you may qualify for a Life Settlement, read the Get Started section below.
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Do you think you may qualify for a Life Settlement? If you have a life insurance policy, and are over the age of 65 years, contact us at Bridge and we’ll help evaluate your case, do the due diligence and provide you with the best offers on the market by comparing Life Settlements online. Contact Bridge today for a free, no-risk, Life Insurance policy appraisal today!
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