Life insurance is a mainstay in property and business succession/buy-sell planning. However, despite its widespread use, many advisors and their clients focus on the policy’s death benefit or current cash surrender value (CSV) rather than viewing the value of a life insurance policy as an investment asset with current fair market value. Huh. By considering a life settlement, advisors and their clients can reasonably value and potentially monetize life insurance policies to address immediate financial or non-tax planning needs. A life settlement is the regulated sale of a life insurance policy to a third party institutional buyer for an amount greater than the policy’s CSV but less than its current death benefit. After collecting the data, the process can take 30 to 90 days.
The Life Settlement option is particularly relevant when: (1) a subscriber is otherwise planning to stop paying premiums; (2) the cash value of the policy is declining; and/or (3) the subscriber survives or does not wish to live longer than the insurance coverage is required for his intended planning purpose. Life settlement can support exit strategies for underfunded (or poorly performing) policies owned in irrevocable insurance trusts and other premium finance and split-dollar transactions.
three threshold questions
Customers should find out a life settlement for a policy when they can answer “yes” to the following three questions: (1) Whether the life insurance within the policy should eliminate death benefit coverage or tax-free build-up. want or need? (2) Whether the estimated life expectancy of the life insured is within acceptable parameters to life settlement buyers? and (3) whether the policy is of such a nature as is eligible (ie, marketable) for life settlement?
1. Desire/need to exit the policy. The need or desire to maintain life insurance coverage may change over time. For example, based on the recent higher exemptions and use of a sophisticated transfer-tax scheme, the client may no longer face the same asset tax risk or asset liquidity needs. Alternatively, perhaps the client’s cash flow is currently tied up in illiquid investments, and they wish to explore short-term liquidity options. An existing or expected change in the client’s finances can make the policy too expensive to maintain, while a change in family structure (for example, the death or divorce of a spouse) can eliminate the original need for death benefits. The insured may also opt out of the desired coverage, which means the premium to retain the policy will skyrocket if the subscriber lives beyond a certain defined age.
For businesses, life insurance originally obtained to fund the buy-sell of certain business interests may no longer be needed due to the retirement of the owner or the sale of the company. In a corporate context, life insurance coverage may have been initially obtained for the repayment of certain bonding or debt obligations or representations in transactions and to fund warranties and/or deferred compensation. Over time, those original planning objectives cease to exist, and the parties agree that they should simply stop paying premiums and cancel or surrender the underlying policies.
2. longevity of the insured, The estimated longevity of the insured is an important factor in whether the policy will be marketable for a life settlement and the estimated size of the sale proceeds. Typically, life settlements include policies that insure individuals in their 60s to 90s with a life expectancy of 15 to 18 years. An ideal insured has a policy issued with a “preferred” or “standard” risk rating, but has since experienced a decline in health. This decline effectively creates a health arbitrage, or mismatch, that will result in what life insurers will no longer consider a high-risk insured (even if the insured has good overall quality of life, access to higher and better quality medical treatment). Thanks for. Wealthy people can afford).
3. Eligible Policies for Life Settlement, Life settlements are available in all states and Washington, D.C. All policy types may be eligible, including term. Most buyers are looking for policies with a death benefit of at least $100,000 to $100 million. Policies with little or no cash value are usually fixed. A policy with a high cash value or debt can be detrimental to the valuation of the policy for life settlement purposes (leaving a low net death benefit for the buyer).
In practice, however, certain policy types and features will yield higher values ​​in life settlement:
- Universal life, including survival, is the most attractive category of policy purchased, which includes variable universal life policies and indexed universal life policies.
- Some products will generate the most value, such as Guaranteed Universal Life (GUL), as well as policies with riders, such as a no-lapse guarantee (NLG) and return-of-premium. Pay special attention to GUL/NLG contracts as buyers will buy the policy without reviewing the medical records. Buyers view these policies as safe long-term investments, as there is almost no risk of the carrier increasing the internal costs of insurance (death charges and expenses).
- Variable duration may also have value if the life expectancy of the insured is eligible. However, the annual renewable term usually has no value, because unless the policy has a lower life expectancy before rising costs, premiums can increase rapidly.
- Perhaps unsurprisingly, the least purchased policies are whole life insurance contracts, as they typically have higher cash values ​​and debt. For institutional buyers with billions to invest in maintaining the acquired policies, buying policies with a higher cash value, which results in a lower net death benefit, is not as attractive.
Insurance carrier ratings and behavior can also affect price. Carriers with higher ratings tend to demand higher offers than carriers with lower ratings or who stop issuing new life insurance policies.
*Full version of this article, Role of Life Settlements in Estate PlanningAppears in the April 2022 issue of Trusts & Estate magazine.
