How long have life settlements been around?
The market as we know it today originated in 1989, however, life settlements for endowment policies have been around since 1843 in England.
What types of policies are purchased?
Universal Life, Variable Universal Life, Whole Life, Key Man, Split-dollar, Buy-Sell, Corporate/Company Owned Life Insurance (COLI), Bank Owned Life Insurance (BOLI), Term, Group Life Insurance. Owned by an individual, trust, corporation or charitable organization.
How much will I receive for my policy?
These factors determine the amount you could receive:
Can a policy with any size death benefit be sold?
The market is most active for policies with death benefits in excess of $500,000, however, there are a few sources that will purchase policies with death benefits as low as $50,000
How old does a policy need to be for a life settlement?
Most life settlement providers and will not purchase a policy that is less then two years old and most reputable brokers will not engage in transactions involving policies that are less then two years old.
Can any entity engage in a life settlement?
Providers may purchase from any type of entity such as a trust, an individual, a partnership, a corporation, or a charity as long as the entity itself does not have any restrictions that prevent it from engaging in a life settlement transaction.
Is a survivorship policy eligible for a life settlement?
Survivorship policies may be purchased but they are less attractive to buyers if both insureds are still living.
What type of policy is most popular among buyers?
Universal life policies and/or term policies that are convertible to universal life are generally the most attractive to buyers. This is because many universal life policies allow buyers to pay minimum premiums based on the pure mortality costs. To investors, this approach often results in lower outlays and higher returns on the cash flows required to maintain the policies until the death benefits are collected.
Is the US the only country where life settlements are popular?
Life settlements are popular in a number of countries outside the US, including Japan, Great Britain, Germany, Luxemburg, Austria, The Netherlands, Norway, and Ireland to name a few.
Are life settlements legal?
Life settlements were legalized in The United States in 1911 by a Supreme Court Decision.
Are insurer's required to advise policyholders to consider life settlements?
The State of Washington was the first US State to require life insurance companies to advise seniors a life settlement is an option to lapsing or surrendering a policy. Other states are considering similar legislation to make sure consumers are given fair and reliable information to use when making decisions about the disposition of their life insurance policies.
How is the insured's life expectancy determined?
Life expectancies are determined by third party medical providers who carefully analyze the insured's medical records.
Is there any obligation?
No. There is never any obligation to accept a Life Settlement offer.
Do I have to sell all of my policy?
No. You can sell only a part of your policy and assign or transfer the part being sold. You will continue to own the unsold portion of the policy.
How long does it normally take to sell a policy?
Under normal circumstances most people receive their settlement proceeds within 60-90 days after they submit an application.
What happens to the policy after I sell it?
All rights and obligations of the policy are transferred to the new owner. They will be responsible for making premium payments on the policy. If you had any loans on the policy they will be responsible for repayment instead of you. The new owner will name a new beneficiary of the policy who will collect the proceeds upon the insured's passing.
Are the proceeds taxable?
On May 1, 2009 the IRS issued Revenue Ruling 2009-13 regarding a seller's tax liability and Revenue Ruling 2009-14 in conjunction with a buyer's tax liability of a life insurance policy that is part of a life settlement transaction. Sellers and buyers should consult their professional advisors for the interpretation of these guidelines.
What if I change my mind?
If you change your mind about selling your policy, you can cancel the life settlement contract at any time up to the end of the period stipulated in the Life Settlement Purchase & Sale Agreement. This period is usually between 15 and 30 days but may vary on a state by state basis. If you change your mind, the provider is required to have the insurance company transfer the ownership of the policy back to you. If you have already received payment you are required to return it to the provider.
What if I die shortly after selling my policy?
If you die at any time up to the 15th day (30 days in some states) after you receive the money from the provider, the settlement contract will automatically cancel. The provider will pay the owner of your policy or beneficiaries designated by the owner in the life settlement contract any proceeds it receives from your policy, minus any money it already paid for the purchase of your policy and any premiums it paid to the insurance company to keep your policy current. The insurance company or the provider should refund any unearned premiums paid.
What if I still need coverage?
Frequently sellers secure less expensive coverage before selling an existing policy. If you have an older, high premium or under performing policy we can help you obtain bids for new coverage while we are getting offers to purchase your existing policy. Since people are living longer, insurance companies have lowered rates significantly during the past few years, especially at older ages. Therefore, it is sometimes possible to buy new insurance at less cost than just a few years ago. Visit the Examples page to see how we've helped others reduced their life insurance cost.
How is Policy Settlement paid for their services?
There is never any charge for us to evaluate your life insurance policy. There is absolutely no commitment or fee for these services if you decide not to accept an offer for your life insurance policy. You always have the option to decline an offer. If you accept the offer, the broker handling your settlement is compensated by the funding source.
What is the difference between a life settlement and a viatical settlement?
Some states use the term viatical to refer to all types of life settlements even though their are important differences between the two terms. A viatical life settlement refers to the sale of a life insurance policy covering on an insured whose appropriate health care practitioner has declared them terminally ill with less than two years left to live or has declared them chronically ill according to The Department of Health and Human Services guidelines. All other life settlement transactions are referred to as life settlements.
How can buyer's minimize their carrying costs?
The most efficient method of reducing carrying costs is to just the pay minimum premiums to keep the policy in force. Professional investors utilize sophisticated financial model to help accomplish this task. The COImgr tool was developed by policysettlement.com to help consumers utilize a similar approach to managing premium outlays based upon the insured's life expectancy and the insurance costs specific to the policy.
How do buyers determine how much to pay for a policy?
A number of factors can influence how much an investor will pay for a policy, but the primary three are 1) the insured's life expectancy, 2) the cost of premiums to maintain the policy to the insured's life expectancy, and 3) the rate of return the investor expects on the cost of acquiring the policy and paying premiums until the death benefit is collected.
Who pays the cost of the escrow agent?
The life settlement provider normally pays the escrow agent.
How do obtain information about providers?
Ratings agencies such as Standard and Poor's and the Scope group rate life settlement providers. Keep in mind, however, that vetting a life settlement provider is usually done by your life settlement broker before funding a life settlement transaction. In regulated states, they may be able to access the public annual statement the life settlement provider is required to submit to the state insurance department. In non-regulated states, they should request and review the same information that is required in regulated states.
Why is it better to work with institutional buyers?
Institutional buyers are normally more financially stable and therefore have access the capital needed to complete a life settlement transaction in a timely manner. In addition, they normally have larger staffs that allow them to more quickly meet the compliance and disclosure requirements imposed by regulators. Because institutional investors typically acquire a number of policies on insureds with similar life expectancy their overall returns are less dependent on an individual insured's longevity. A individual investor, on the other hand, may be depend on the timely demise of an individual insured for its profitability.
How do you start the life settlement process?
The best way to start the life settlement process is by getting an informal life settlement estimate or obtaining a formal life settlement valuation/appraisal. Either can be used to help you determine if the expected payoff justifies the time and invasion of privacy required to complete a life settlement transaction.
What are securitized life settlements?
Securitized life settlements are diversified pools of policies that are offered as collateral for third party investment. Financial instruments backed by cash flows and value of the underlying policies are then sold to investors. For more information see the March 24, 2008 AM Best Article, Life Settlement Securitization.
Who are the most common holders of life settlement pools?
Currently, hedge funds are probably the most common holders of life settlement pools.
What correlation exists between a affluence, the leading causes of death and life settlements?
Typically the class of individuals (affluent seniors) who participate in life settlements are healthier than the overall population. As a result, the leading causes of death are less likely to impact their longevity than that of the general population.
How does life settlement underwriting differ from life insurance underwriting?
Life insurance companies rely on different statistical data than life settlement companies. Their underwriting practices do not account for the fact that affluent seniors outlive those of lesser means due to superior medical care as well as increased mental and physical activity.
What happens if the ownership of a policy is changed to facilitate a sale in another state?
Laws very among states. Some consider a change of ownership to accommodate a life settlement to be a fraudulent act.
What risks are associated with foreign buyers?
Foreign life settlement investors may not maintain a place of business in the US and may be subject to regulations in more than one jurisdiction which could make it more difficult for you to discover what regulatory actions that have been taken against them.
What is an exclusive marketing arrangement and what are the risks?
Some exclusive marketing agreements require the owner to transfer ownership without the receiving cash. These types of agreements should be avoided at all costs because they can result in legal costs to reclaim policy ownership if a sale does not take place.
Is it true some insurance companies bar their agents from providing life settlement services to their clients?
Reportedly, some carriers discourage if not prohibit their agents from advising clients of the availability of life settlements. At least one state has laws prohibiting this practice and other states will likely follow.
What risks are associated with obtaining replacement coverage for a settled policy?
Individuals who need replacement coverage must make sure it is available before executing a life settlement agreement. The two major considerations are whether or not an indivdual is eligible for more coverage on 1) a finanical basis and 2) a medical basis. Insurance companies use a person's finances to help determine their avaialble insurance capacity which results in a finite limit of available protection and includes a life settlement policy, since it remains in force and therefore reduces the amount of available replacement coverage. Insurance companies also consider the insured's health when deciding wheter or not to issue replacement covrage and at what price. therefore, before selling an existing policy the insured shoud first take into account the availability and affordability of any replacement covarage that might be needed. Then, to prevent a "gap" in coverage, the seller should secure written approval for new coverage along with verification the replacement policy will be effective no later than the coverage effectively ceases under the policy being sold. For more information please see A Key Settlement Consideration: Can Clients Get Replacement Coverage? in the November 2, 2008 National Underwriter.
Is the agent who sold a policy allowed to purchase it from the policy owner?
At least two states prohibit an agent from buying a policy they have sold. In our opinion, reputable life insurance agents should not participate on the practice of buying policies they have sold.
What potential conflicts of interests should consumers be aware of?
The most common occurs when a broker funds a life settlement transaction with a life settlement provider or buyer that is controlled by, or under common control with the life settlement broker.
Is there a risk that life settlements might cease to exist?
Because the life settlement market is relatively new, there are uncertain risk factors that could impact its longevity. These include the possibility that 1) life expectancy reports could become unreliable, 2) a glut of policies could stress the market, 3) insurance companies could disrupt the market either through litigation or developing other alternatives to life settlements.
Are life settlements regulated?
Currently eight states and DC do not have life settlement regulations of any type. More information.
Are there risks associated with buying policies from seniors who lack the mental capacity to make an appropriate decision?
Seniors may lack the mental capacity to fully understand a life settlement transaction due to illness, medication, and mental disability. From the buyers standpoint there is the risk a transaction will later be voided because the owner was mental competent when they entered into the transaction. For sellers and beneficiaries, there is the risk a policy could be sold that should have been kept or sold for an amount less than its value.
Is there a risk that policy ownership might ultimately end up in the hands of an unscrupulous buyer?
There is a risk that a policy sold to a legitimate buyer could later be resold to new owner who is less desirable. Even though a background check on the provider and buyer of the policy is useful for the initial transaction, is no guarantee the policy will not be later resold to someone less desirable investor.
What is an insurable interest risk?
The risk that the initial buyer of the policy did not possess the required insurable interest in order to purchase the insurance. When this occurs, life insurance companies have the right to invalidate the policy. Their action could result in significant financial loss to a buyer who had previously acquired the policy in a life settlement transaction. In addition, under the terms of the life settlement agreement, the seller could be responsible for the buyer's loss if the seller knowingly sold a policy with that was fraudulently obtained.
What unique risks do trustees have when it comes to life settlements?
The primary risk is the trustee would not live up to its fiduciary responsibility to act in the client's best interest. The primary contributing factors would more than likely be a lack of education or improper due diligence.
How frequently can an insured be contacted about health information?
This varies according to state regulations but generally no more often than quarterly for insured's with life expectancies over one year and no more often than monthly for insureds whose life expectancy is under one year.
What future impact will life settlements have on life insurance companies?
Perhaps more positive then negative. Some carriers are already entering the life settlement business. Others could design products that actually accommodate life settlements. Still others may use their financial strength and know how to create alternative products and services that effectively compete against life settlements.
What is the potential impact of longevity risk on the life settlement industry?
Longevity risk is the potential for an insured to live beyond their life expectancy and in return cost investors additional outlays resulting in diminished returns. The poor returns from life settlement portfolios with adverse longevity experience could discourage new investment down the road.
What is the potential impact of life settlements on the taxation of life insurance products?
It could have a negative impact on the tax favored treatment afforded the inside build-up within policies and the tax free proceeds payable upon death. On the other hand, life settlements often result in additional tax revenue to State and Federal governments compared to the traditional uses of life insurance.
How should a buyer decide to get into life settlement investments?
Investors participate in life settlements in hopes of receiving steady non-correlated returns, predictable liquidity, and understandable/measurable risks. The returns they receive depend primarily on 1) the death benefit of the policy, 2) the insured's life expectancy, 3) the premium cost for maintaining the policy until the insured's life expectancy. The predictability of returns is heavily influenced by longevity risk which hinges on the accuracy of life expectancy estimates.
What opportunities do life settlements offer baby boomers for retirement planning?
As baby boomers re-prioritize their overall financial concerns to accommodate the increased importance of sustainable retirement income, the protection element of life insurance may take a back seat to the income generation potential of a life settlement. As a result, a vehicle previously viewed as an expense could become a hidden asset to be managed until maximum value is attained.
Can life settlements supplement Social Security?
A life settlement can be used to supplement social security and all other forms of retirement income.
What financial products are being designed as a result of life settlements?
Life settlements may soon become a main stream alternative asset class that is less correlated to market fluctuations and more useful as a risk hedging device.
Does a life settlement make sense if you still need life insurance?
Yes, in some instances where more appropriate or more affordable replacement coverage can be obtained in advance of finalizing the life settlement of an existing policy.
What alternatives are there to executing a life settlement?
The policy owner can surrender the policy to the life insurance company that issued the policy. If the policy has a cash value, the insurance company will pay to the policy owner the amount specified in the policy. The policy owner can also keep the policy by continuing to pay the current premiums, asking the insurance company to reduce the face amount of the policy in exchange for reduced premiums, asking the beneficiary(s) to assist paying the premiums, borrowing against the cash value or secondary market value to pay premiums, or utilizing a more efficient premium structure to minimize outlays and maximize the death benefit through the use of a service like our COImgr.
How does a policyholder determine if they should sell a policy now, later, or never and who is responsible for helping them make the determination?
The following factors should be considered:
What factors should be considered in addition to the economics of a life settlement?
The overall suitability of a life insurance settlement depends on both the emotional and financial considerations of the policy owner(s), the insured(s), and the current beneficiary or beneficiaries. Our GOALmgr tool helps you gauge and prioritize the most common concerns related to the risks of living too long (longevity risk) and dying too soon (mortality risk). GOALmgr results may help decide if a life settlement is in your best policy option and, if so, how life insurance or settlement proceeds can best be utilized to compliment your overall financial plan.
When is a policy loan preferable to a life settlement?
Loans typically works best for short term emergencies including those common to insured's who have short life expectancies. They can also makes sense when a policy is not eligible for a life settlement.
Are their regulatory responsibilities and ethical considerations for life insurance companies?
At least one state has passed legislation requiring life insurance companies to make their policy holders aware of the life settlement option. As the life settlement market continues to grow carriers should anticipate further regulation and better defined standards of practice for life settlement transactions. The long term success of the life settlement industry will depend on life insurers and the life settlement industry's ability to cooperate for the benefit of policy owners, insured's, and beneficiaries. This will require significant improvements in the transparency of all elements of life settlement insurance transactions including the areas of compensation, alternatives, replacement insurance, privacy, and suitability.
Are there any regulations governing the resale of a life settlement policy?
There are currently no laws governing the resale or trading of life settlement policies.
How long must providers/buyers retain records?
This varies by state. There is no uniform time period. For more information about your state, please check our links to state insurance departments.
Are there examination procedures for providers and brokers in regulated states?
This too varies by state. There are no uniform requirements that apply to all states. For more information about your state, please check our links to state insurance departments.
Are there standardized disclosure statements for brokers and providers?
There are no standardized disclosure statements that apply in all states. For more information about your state, please check our links to state insurance departments. For more information about disclosures in general please visit the disclosure page of our website.
How fair are life settlement laws and regulations to consumers?
Its reasonable to assume that life settlement laws and regulations are intended to be fair to consumers, however, since many are new it may take some time to determine how well they meet the objective of fairness to all parties of the life settlement transaction.
Should life settlements be more regulated?
Yes, and they are now becoming more regulated and transparent.
Can the life settlement industry operate with a state regulated environment?
The life settlement environment can operate in a state regulated environment, however, more uniform regulations will broaden the market for the benefit of the residents of all states. As the market now stands, more restrictive states may limit the options available to their residents by discouraging life settlement providers from doing business there..
Would Federal regulation be better than state regulation?
Federal regulation might be simpler and more uniform but more bureaucratic. Since insurance companies themselves are already regulated by states, utilizing the same for life settlements seems to make more sense.
Has the media been fair to the life settlement industry and consumers?
This is not a yes or no question, since the accuracy of the media's stand on a particular issue is often the result of their information sources. The stakeholders themselves will ultimately determine the direction and the success of the industry. Throughout the process, the media has a responsibility to be thorough and then weigh and balance the information it receives from all sources.
Are legal remedies adequate to assure fair treatment of all stakeholders?
This varies according to state regulations and each states ability to enforce its statutes. For the protection of seniors, enforcement needs to be as rigorous as possible.
Are the states that are currently unregulated likely to remain unregulated?
There are currently eight unregulated states along with DC. Six of the unregulated states currently have regulations under consideration. The Life Insurance Settlement Association (LISA) provides a State Document Report that is updated regularly. Consumers in unregulated states should exercise extreme caution and choose a broker who is committed (in writing) to personal standards commensurate with those required in regulated states.
What is the primary unregulated aspect of life settlements that may become regulated?
There may not be only one primary aspect. Commissions payable to brokers in conjunction with life settlements gets a lot of mention, although suitability may be just as important, if not more.
How much additional transparency will be result from proposed legislation?
As proposed regulations unbundle the various aspects of life settlements, the life settlement industry will be come more transparent.
What are the most popular models for future life settlement regulation?
There are two basic models. One from the National Counsel of Insurance Regulators (NCOIL). Another from the National Association of Insurance Commissioners (NAIC). For additional information visit our regulators page.
Are states adequately equipped to undertake the enforcement burdens associated with additional regulation?
It does not appear the new regulations come with new funding for enforcement. As a result, consumers must carefully select brokers who take their fiduciary responsibility seriously. In addition, consumers must insist on full transparency, be aware of best practices, and verify before trusting.
What problems are associated with selling policies that are under two years old?
Some states have regulations that prohibit this practice. Most life settlement providers and brokers will not purchase a policy that is less then two years old and most reputable brokers will not engage in transactions involving policies that are less then two years old. This is because life insurance policies are contestable for a two year time period from the issue date. During this time an insurance company has a contractual right to cancel a policy or refuse a claim under it. To enforce, the insurance company may investigate the representations made within the application for the policy as well as any representations made during recorded interviews. After two years policies can still be cancelled, but only for fraud or failure to pay premiums. Even thought some buyers will purcahse policies that are under two years old, their agreements may hold sellers financially responsible for losses they incur when a policy is successfully contested. Seller beware.
Should there be more penalties for abuses and fraud?
Penalties should match the severity of the abuses. Serious abuses like fraud should result in serious penalties. However, abuses must be spotted before the abusers can be penalized. Because regulators often lack the manpower need for proper enforcement, consumers must be well informed to spot irregularities.