It is important that policy owners discuss with their life settlement broker or life settlement provider all the required disclosures applicable to their state law. Typical disclosures include but are not limited to the following:
- The availability of alternatives to life settlements
- The taxable nature of settlement proceeds
- The fact that proceeds of the settlement contract may be subject to claims of creditors
- The number of calendar days to rescind the settlement contract
- The amount and method of calculating life settlement broker’s compensation
- Life settlement broker must also disclose to the owner a full and complete description of all offers, counter-offers, acceptances and rejections relating to the settlement contract.
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.
- 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 Settlement brokers and providers receive fees for their services. Per applicable state regulation, compensation is required to be disclosed in a transparent manner by a licensed life settlement broker and related parties.
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 proceeds of a life settlement are almost certainly taxable. The assistance of a professional tax advisor should always be sought. The proceeds of a life settlement could also be subject to the claims of creditors. If the seller is within two years of death, other laws making the proceeds tax-free may apply.
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)
There are no upfront fees, credit score, or income level requirements. There is also no obligation to accept a contingent offer.
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.
Life settlement providers may purchase your policy themselves or represent the buyers – these buyers are often institutional investors. Life settlement providers perform valuation analysis, thorough due diligence and legal analysis on potential life settlement cases, then make recommendations to institutional investors.
As a policy owner, you do have some exit strategies when it comes to your life insurance policy – the underlying asset of life settlements. Unfortunately, only six states require the life insurance companies to notify policy owners of the alternatives to lapsing or surrendering a policy back to the insurance company.
The possible exit strategies of a life insurance policy include:
- Accelerated death benefits;
- Assignment of the policy as a gift;
- Replacement/1035 tax-free exchange;
- Conversion of the policy from a term policy to a permanent policy;
- Conversion of the policy to obtain long-term care health insurance coverage; and
- Maintenance of the policy through loans using the policy or its cash surrender value as collateral.
For more information about which option is best for you, please consult with a LISA member company.
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.
Always remember that you do not have to accept an offer to purchase your life insurance policy, even if you shopped around for the best price. If you do accept an offer and later reconsider, be aware that some states have laws that allow you to change your mind within a certain amount of time.
Life settlements are not much different than other established retirement planning vehicles, such as pensions and annuities. With each of these assets, you receive a specific payment that is based on a calculation from insurance underwriters that takes into account how long you and other individuals in their pools are expected to live. If you should happen to pass away sooner than projected, the other workers in your pension fund benefit financially from your death.
Life settlements work similarly to other assets that are based on life expectancy and it’s very unlikely you would be selling your life insurance policy to another person. For most life settlements, there is no mysterious stranger on the other side of the transaction — it’s most likely a huge corporation, a large bank or a major hedge fund. These institutions treat each life settlement they purchase as one small piece of a much larger investment portfolio (sometimes called “blind pools”) and they simply aren’t focused on individual policies. The identities of insured individuals are protected by privacy laws and life settlement companies have established tight procedures to keep all insured medical and personal information confidential. Once your policy is sold to a third party, your identity is virtually unknown to the institutional owners.
Still, the life settlement option is not for everyone. The best way to make sure that you get all of the answers you need is to work with a professional who is a member of LISA and to only consider settlement transactions with reputable, well-established funding sources.
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.
Yes, life settlements are both legal and regulated. In 1911, the U.S. Supreme Court issued a decision in Grigsby v. Russell, which recognized the rights of the life insurance policy owners to transfer ownership of their life insurance policies to a third party that was unrelated to the policy owner/insured and did not hold an insurable interest in the policy owner/insured. This landmark ruling paved the way for the birth of the life settlement industry in the United States because the Court upheld a policy owner’s right to assign his/her life insurance policy.
As of 2015, 42 states and the territory of Puerto Rico regulate life settlements, affording approximately 90 percent of the United States population protection under comprehensive life settlement laws and regulations. Of these states, 31 states have a statutorily mandated two-year waiting period before one can sell their life insurance policy, while 10 states have five-year waiting periods and one state (Minnesota) has a four-year waiting period. Most states have provisions within their life settlement acts whereby one can sell their policy before the waiting period if they meet certain criteria (i.e. owner/insured is terminally or chronically ill, divorce, retirement, physical or mental disability, etc.).
Moreover, 20 states follow the National Conference of Insurance Legislators (NCOIL) Life Settlement Model Act, representing almost 53 percent of the U.S. population.
Transparency is a key part of life settlement regulation around the nation. Recent laws call for full disclosure of how much compensation is earned from a transaction, as well as communication of all offers, counteroffers, and rejections throughout the transaction process. In addition, most states require that consumers are provided with information about alternatives to settlements, risks related to taxation and government assistance, and the licensing of life settlement brokers and providers.
For the vast majority of states, a life settlement transaction is regulated by each state’s Department of Insurance, which typically requires the buyer (i.e. life settlement provider) of the life insurance policy to be licensed by that state. Most states require all forms used in the transaction to be reviewed and approved to assure clarity and fairness. Regulated states have rules that the broker and buyer must follow, such as when the sale proceeds must be placed into an escrow account, or when the proceeds must be released to the seller after the transfer of ownership has been acknowledged by the carrier. In this way, the regulations protect the seller.
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.
- 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 settlements are very common, but unfortunately many seniors – and their financial and legal advisors — are unaware that a life insurance policy is personal property. Life insurance policies may be sold to institutional investors for a value greater than their cash surrender value.
In an Agent Media/Life Insurance Settlement Association (LISA) 2011 Life Settlement Market Study, nearly 25 percent of agents said that greater consumer awareness of life settlements would help them foster more settlement opportunities.
The good news is that consumer awareness is on the rise. Many states now require life insurance carriers to notify policy owners about life settlement options when they are about to lapse a policy. These measures and efforts by LISA and the industry have raised awareness of the life settlement option for policy owners.
As the voice of the life settlement industry, LISA has adopted a position and stated publicly that this marketplace is not appropriate for individual investors acting on their own. The primary buyers of life settlements are institutional investors, such as pension funds, endowments, foundations and private equity funds.
Investing in life settlements is strongly discouraged for all but the most experienced investors. Most life settlement companies do not accept individual investors, and LISA doesn’t advise any individuals to invest their retirement savings in the industry.