Life Settlements Evolve to Offer Even More Solutions to Seniors
By Steven Arenson

One way agents can help seniors meet their financial goals is by using life settlements to tap into an asset that has most likely been a staple part of their financial security for years — life insurance. A life settlement, the sale of a life insurance policy for its present market value, provides seniors with a way to access the "equity" value that has built up in their life insurance policies to fund their current financial objectives.

Accessing the True Market Value of Life Insurance

Before life settlements, the only ways for clients to "cash in" on life insurance polices were to borrow against the policy’s cash value or to surrender the policies altogether. In the case of term policies, which do not build up cash, the policy owner would not receive any money for surrendering the policy, even though premiums had been paid out for years. Today, the true current market value of life insurance policies, especially larger face value policies owned by older high net worth individuals or businesses, is often greater than the policy's surrender value.

The life settlement market grew out of the Viatical market of the late '80s and early '90s. Viaticals almost entirely focused on the purchase of in-force life policies that insured people who were HIV-positive or living with AIDS. This financial option transformed an asset of little present value and which had been acquired at little or no cost, into a lump sum immediate cash payment. Suddenly, there was a way to pay for life's basic needs and improve the quality of medical care.

While similar to Viaticals in concept, life settlements are designed for and marketed to a different demographic: People who are at least 65 years old, who do not have a terminal illness, and, generally, who have an estimated life expectancy of 12 years or less.

Any kind of life insurance policy is considered for a life settlement, including universal, survivorship, term, whole life as well as variable life insurance policies. In fact, a policy need not have any cash value to be considered for a life settlement. The policy can be owned individually, by a partnership or corporation, or by a trust. An irrevocable life insurance trust ("ILIT") is typically used if a life insurance policy is held in trust.

To qualify, the insured must typically have a sub-standard rating and have experienced a change in health status since the policy was issued. The policy must be beyond the contestability period and must be issued by a carrier rated "A" or better by the major agencies.

Connecting with Client Needs

The reasons why a life settlement may be the better option for a client are as diverse as the clients themselves. For example:

• A reduction in a client's estate size means less insurance is required to pay projected estate taxes.
   
• The current amount of coverage is unnecessary due to increasing estate tax exclusions or the death of a beneficiary.
   
• The policy owner's current asset mix is weighted too heavily in insurance.
   
• A policy owner wishes to transfer liquid assets to beneficiaries now.
   
• A policy purchased to finance a buy/sell agreement is unnecessary after the business has been sold. • Instead of letting the policy lapse, a company can use a life settlement to sell key person policies on former employees who have either retired or left the company.
   
• A client wishes to invest in a more appropriate product, such as a lower cost survivorship policy, single premium annuity for supplemental income, long term care insurance or other asset protection tools.
   

The Role of the Agent

Agents have a fiduciary responsibility to present their clients with all of the options that are available to meet their needs. Imagine the backlash if the client learns that an agent allowed his/her policy to lapse and receive nothing for it — or surrendered it for only the cash surrender value — when the client could have received a considerable amount more through a life settlement.

After determining when and for whom a life settlement would be appropriate, your next step is to find a life settlement provider. Agents should always ask the settlement provider about their standards and business practices and how their life settlements are funded, making sure you can identify that their funding source is institutionally derived. Institutionally Life Settlements Evolve to Offer Even More Solutions to Seniors By Steven Arenson As seen in INSURANCE Marketing October/November 2002 funded providers have gone through meticulous due diligence processes and operate under strict guidelines and underwriting practices. Do not do business with a provider who will not name their funding source.

Established and principled life settlement providers follow the guidelines set forth in the NAIC Viatical Model Act and Regulations and are licensed in required states. Such companies will also offer complimentary professional liability coverage to their contracted representatives.

Institutional Funding, Regulation and Growth

In less than one year's time, more than $1 billion of institutional capital has entered the life settlement industry from large, world-recognized banks and insurance companies. Such interest and funding has greatly aided in the development of industry regulations and guidelines.

Industry leaders anticipate the life settlement market will become more regulated and welcome such legislation. Enhanced regulation of the life settlement industry is a critical element in the acceptance and growth of the industry as a mainstream financial service. The standards and practices that are being established bring additional benefits and consumer protection to the policy seller, their professional advisors as well as the policy buyers and their institutional funders.

Life settlement sales are expected to reach between $20-50 billion per year within the next 10 years. This is due mainly to the increase in the senior population and the amount of insurance held by them. According to Conning & Company, an industry research firm, individuals who are 65 and older currently own more than $492 billion of individual policies. This does not include corporate or trust-owned policies insuring individuals age 65 or greater. Life settlement companies estimate an additional $200 billion of in-force coverage from these sources.

Agents can receive substantial referral commissions from successful life settlement transactions when working as a contracted representative of a life settlement purchaser. Since the policy that is sold in a life settlement remains in-force, agents may continue to receive renewal fees if they were the agent of record in the original sale of the policy or, in the case of some term policies, conversion fees. In addition, the proceeds of a life settlement can be used to purchase products more suited to a client's current needs, thus generating new product sale commissions.

Life settlements not only enable agents to find a new revenue source from their current book of business, but also enable them to provide their clients with a way to access the true market value of an asset that was once thought to be frozen. Adding life settlements to their list of services will put your agents at the cutting edge of a market that has just begun to realize its potential.