Life Settlements

A life settlement is a financial transaction in which a life insurance policy owner possessing an unneeded or unwanted life insurance policy sells the policy (at fair market value) to a third party for more than the cash surrender value offered by the life insurance company. The purchaser becomes the new beneficiary of the policy at maturation and is responsible for all subsequent premium payments.

Generally speaking, life settlements are an option for high-net-worth policy owners age 65 or older. Independent estimates report that among this group, 20% of policies have a market value that exceeds the cash value offered by the carrier. And while many policy owners are unfamiliar with life settlements until a financial professional mentions the option to them, the concept has gained attention from high-profile proponents such as Warren Buffett, former U.S. Representative Bill Gradison, and numerous media sources including The Wall Street Journal, Time Magazine, Business Week and The Economist. A growing number of experts now believe that informing clients about offering life settlements should fall under the fiduciary duty of a financial adviser.

Typical criteria for the owner of a life insurance policy to become an eligible candidate for a life settlement transaction would include:
  • Policy holders age 65 and older (ages as low as 55 are possible)
  • $50,000 minimum face amount
  • Policy active minimum of two years
  • Low cash surrender value
  • Premiums less than 8% per annum

Providers

Life settlement providers serve as the purchaser in a life settlement transaction and are responsible for paying the client a cash sum greater than the policy's cash surrender value. The top providers in the industry fund many transactions each year and hold the seller's policy as a confidential portfolio asset. They are experienced in the analysis and valuation of large-face-amount policies and work directly with advisors to develop transactions that are customized to a client's particular situation. They have in-house compliance departments to carefully review transactions and, most importantly, they are backed by institutional funds.

Life Settlement providers must be licensed in the state where the policy owner resides. Approximately 41 states have regulations in place regarding the sale of life insurance policies to third parties.

Steps in a transaction

  1. Policyowner consults with an advisor, decides to sell his or her policy.
  2. Policy owner and advisor decide whether to work with broker or to go directly to providers.
  3. Client & advisor submit policy for valuation. Client releases medical information.
  4. If policy meets criteria for a life settlement, providers send offers directly or through a broker.
  5. Client and advisor review offers and client accepts his preferred offer.
  6. Client and advisor complete the provider's closing package, and return essential documents.
  7. Provider places cash payment in escrow and submits change of ownership forms to the insurance carrier.
  8. Paperwork is verified and funds are transferred to the policy seller.

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