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Life Settlements

Updated: Oct 17


Life Settlements


What is a Life Settlement? A life settlement is the sale of a life insurance policy to a third party for an amount greater than the cash surrender value. The sale involves an insured, usually age 65 or older with a policy that is no longer needed,

wanted or affordable. The buyers are institutional investors that provide the policy owner with a lump sum cash payment. This secondary market for insurance contracts has evolved into an innovative, creative and efficient way to generate wealth.


Strategy in Action


When to consider a Life Settlement?


^ Policies about to be surrendered or lapsed

^ Reduction in the size of an estate

^ Death of a spouse or beneficiary or divorce

^ Retirement and/or the need for additional income

^ Sale of a business

^ Post-bankruptcy and/or pay off debt

^ Termination of an executive fringe benefit plan

^ Need to pay for Long Term Care


What can a Life Settlement do for your clients?


^ Acquire alternative coverage to reflect a change

in insurance needs

^ Help fund insurance on other individuals

^ Provide additional retirement income

^ Create capital for business opportunities

^ Lower debt

^ Provide educational funds and/or current gifts

^ Create capital for charitable giving

^ Pay for medical costs and/or Long Term Care



Who should consider a Life Settlement?


The best candidates are usually people age 65 and older with a medical condition and/or a change in health since the policy was issued. The insurance should have a minimum death benefit of $250,000 and be with companies rated “A” or better from Standard and Poor’s.


What types of policies can qualify for a Life Settlement


^ Universal Life

^ Variable Life

^ Convertible Term

^ Group term (if convertible)

^ Whole Life

^ Second-to-Die



How does a Life Settlement work?


The owner of the policy and the insured complete a brief application, which includes authorization to obtain medical and insurance information. We then proceed to collect medical records, life expectancy reports and policy illustrations. The information is used to solicit offers from institutional buyers until a last, best offer is obtained.


Once the offer is accepted and closing documents are signed, the funds are deposited into an escrow account until the Change of Owner and Beneficiary are recorded by the insurance company. When the transfer is complete, the money is wired to the previous owner. The entire process normally takes about six to eight weeks.


What are the tax implications?


Proceeds are received:

^ Tax free up to the owner’s basis

^ Ordinary income to the extent the cash surrender value exceeds the basis

^ Long term capital gain on the amount over the cash surrender value


With 10,000 baby boomers turning 65 every day, and healthcare, Long Term Care and daily expense costs on the rise, seniors are looking for ways to fund these vital needs. Life Settlements with existing policies may be the way to go to accomplish these objectives.


Here are few examples of how Life Settlements can help you meet these immediate and future needs.


Example 1.


Insured is female age 62 with rising medical bills

Face amount of current Universal Life policy $500,000

The policy owner received $175,000 for a policy they no longer needed

Proceeds were used to pay off medical bills and cover ongoing medical treatment


Example 2.


Insured is a male age 70 with a policy approaching it’s term conversion deadline nearing

The face amount of the current 20 year Term policy is $750,000

The policy owner received $40,000 for a policy with no cash value and rising premiums

With the proceeds the policy owner obtained a policy to cover the age 95.


Example 3.


Insured is a male age 74 whose wife died and coverage was no longer needed

$1,000,000 Universal Life face amount with a cash surrender value of $63,000

The policy was sold for $265,000

The insured/owner then purchased an annuity with the net proceeds

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