Life Settlements

Executive Brief on Life Settlements

Life settlements represent one of the most important financial innovations of the past 30 years. By recognizing the fundamental right of policy owners
to assign their policies, life settlements have created a more competitive life insurance market where consumers enjoy new options and greater value every day. To learn more about what this powerful transaction means to your business, read on.

Power To The Policy Owner®

Life settlements have changed the way we think about life insurance. For policy owners, life settlements have unlocked the market value of life insurance, transforming unneeded policies into assets with significant value. For advisors, life settlements open a host of new strategies for strengthening portfolios and building client relationships. The life settlement industry represents a vibrant pro-consumer market that is creating new solutions and generating unexpected value.

More Value For Life Insurance

Life insurance represents a valuable financial solution to the various needs of families and businesses. Over time, however, these needs change. Loans are repaid; key executives retire; estates become smaller; businesses are sold; estate taxes are reduced – or better yet, no longer exist. Or, with interest rates down, a policy may be too expensive to maintain. According to a leading actuarial consulting firm, more than 85% of all universal life and term policies never result in a death claim. In the past, these policies were surrendered to the insurer, or worse, allowed to lapse for nothing at all.

Life settlements present a compelling opportunity. By enabling policy owners to access the market value of their policies, life settlements can generate significantly more than surrender value for unneeded policies. And this value can create enormous opportunities for policy owners and advisors alike.

One Transaction. Multiple Applications

A life settlement is a financial transaction in which a policy owner sells an unneeded life insurance policy for more than the policy’s cash surrender value and less than its face value. But life settlements can represent much more than an exit strategy for unneeded life insurance policies. With the assistance of an experienced advisor, a life settlement can be a springboard to achieving a policy owner’s broader financial objectives, as the following examples illustrate.

  • Policy replacement – a policy owner who needs to adjust their coverage may benefit by selling a policy on the secondary market and using the proceeds to acquire a more appropriate policy, rather than converting an existing policy.
  • Recouping term premiums – a policy owner who no longer needs their term policy can use a life settlement to eliminate future premiums and recoup a portion of their overall premium outlay.
  • Restructuring cash fl ow – a policy owner with limited cash flow can use the proceeds from a life settlement to fund a reduced policy with lower premiums.

These cases demonstrate how a life settlement creates innovative solutions and opens new opportunities that previously did not exist.

Ideal Candidates

Life settlement candidates are insureds age 65 and over with:

  • a life insurance policy face amount of at least $500,000.
  • a life expectancy up to 20 years.

Common scenarios leading to a life settlement include any number of situations in which a policy is no longer meeting the owner’s needs, such as:

  • the insured has outlived the risk insured against.
  • a business partnership has dissolved.
  • a key employee has retired and the coverage is no longer needed.
  • “vanishing” premiums have not vanished.
  • the financial plan built around the policy is not being met.
  • the owner wants to move the policy’s market value into another asset or buy a more efficient insurance policy.

Transaction Process

The life settlement process begins with our sophisticated valuation system to determine if an off er can be made. Here is how the process generally works.

  • A completed questionnaire and authorization are submitted to Gibraltar Consulting Group along with carrier illustrations and the insured’s medical records for the last five years.
  • Gibraltar Consulting Group evaluates the policy to determine if an offer can be made.
  • Gibraltar Consulting Group relays the offer to the advisor.
  • Once an offer is accepted, Gibraltar Consulting Group issues closing documents.
  • After Gibraltar Consulting Group receives the completed closing documents, the change of ownership and beneficiary forms are sent to the life insurance company.
  • Upon confirmation that the change forms have been processed by the carrier, funds are released to the seller.

The Importance of Due Diligence

Secondary market transactions are funded with institutional capital. Not only does institutional backing provide a secure funding source, it also provides a higher degree of consumer protection with regard to privacy and confidentiality.

It is always important for advisors to conduct their own due diligence to protect their clients’ interests. Advisors should work with a buyer that can demonstrate a strong track record of successfully completing transactions smoothly and efficiently. It is essential to verify that the firm holds the appropriate licenses for conducting business in the policy owner’s state and be sure that they are backed by institutional capital.

The sale of a life insurance policy is a taxable event. Sellers of life insurance policies should seek advice from their tax advisor based on their own particular circumstances.

Policy Valuation: A Key To Growing Opportunity

A policy valuation helps you more accurately assess the performance of a life insurance policy. So you can help your clients better understand the value of their assets. And advise them on opportunities available in the secondary market for life insurance. To learn more about this important process, read on.

An Expanding Role for Advisors

The sale of an existing life insurance policy is no longer a new concept; it is a financial planning reality. Consumers are becoming aware of the potential in life settlement transactions. And life insurance agents, estate planning attorneys, trustees and financial planners are recognizing their responsibility to present clients with this alternative.

A policy valuation is the first step in accurately assessing the performance of any life insurance policy. All that is required are a completed questionnaire, authorization to obtain medical records, and carrier illustrations. There is no cost or commitment on the part of your client.

Good News vs. Good News

The result of a policy valuation might be that the policy is performing well and should be maintained. Or you may find that the policy is worth far more than you previously thought and your client can benefit from a reallocation of those assets through a life settlement. In either case, it is a win.

When talking to your clients, point out that a policy valuation can be considered a necessary part of any annual insurance review, and that it may:

  • unlock the fair market value of your client’s life insurance policy.
  • uncover new sources of liquidity for your clients.
  • provide useful planning options for your clients.
  • be a solution to poorly structured or financed policies.

When talking to your centers of influence (CPAs, Estate Planning Attorneys and Trust Officers), remember that a policy valuation is:

  • prudent for anyone acting as a fiduciary.
  • necessary to ensure all of your client’s options have been explored.
  • appropriate any time a client has a change in circumstances or is considering a change in planning.
  • suitable for corporate-owned, trust-owned and individually-owned policies.

SWAPP

SWAPP, a revolutionary transaction for the secondary market for life insurance, enables policy owners to keep a portion of their life insurance with no future premium obligations. As a result, SWAPP redefines how you manage your clients’ life insurance assets and allows you to offer a compelling new estate planning option. We invite you to learn more.

Insurance Optimized

Life insurance has long been a valuable estate planning tool. However, the cost of maintaining insurance for older, affluent individuals presents significant challenges. Low interest rates combined with longer life expectancies often result in underperforming policies that put the annual premium outlay beyond what a policy owner chooses to maintain.

Still, the need for adequate coverage remains. Prior to the secondary market for life insurance, few options existed for consumers seeking to retain life insurance while eliminating premium payments. Nonforfeiture laws provide for surrender of the policy back to the life insurer for cash or exchange by the issuer for a reduced paid-up benefit. Because both options are based on a value determined by the issuing life insurer, the policy owner’s asset is frequently undervalued. The introduction of the secondary market enables policy owners to benefit from the market value of the original policy, providing more value than a traditional exchange based on the cash surrender value.

The Power of SWAPP

In each of the following scenarios, SWAPP makes it possible to eliminate future premium payments while retaining a portion of the death benefit. Here are some examples of how SWAPP can be tailored to the policy owner’s individual situation.

  • The policy owner may receive a cash settlement in addition to retaining a portion of death benefit.
  • If a policyowner’s need for insurance will decrease over time, SWAPP can be designed to meet that need by providing a decreasing death benefit option.

The result is a revolutionary shift in how life insurance assets are managed. Instead of accepting the life insurers’ nonforfeiture options, advisors are now having their clients’ policies appraised to determine the market value. The information provided by these appraisals can help policy owners use their capital more efficiently.

Ideal Candidates

To qualify for SWAPP, insureds must be age 65 or older with:

  • a life insurance policy face amount of at least $500,000.
  • a life expectancy up to 20 years.

Common scenarios leading to SWAPP include a number of situations in which a policy owner wishes to eliminate future premium payments while still retaining a portion of life insurance, such as:

  • reduction in the value of an estate or business.
  • existing insurance performing below expectations.
  • retirement or sale of a business.
  • change in marital status.

Transaction Process

SWAPP begins with Gibraltar Consulting Group‘s sophisticated valuation system to determine if an offer can be made. Here is how the process
generally works.

  • A completed questionnaire and authorization are submitted to Gibraltar Consulting Group along with carrier illustrations and the insured’s medical records for the last five years.
  • Gibraltar Consulting Group reviews the policy to determine whether an offer can be made.
  • Gibraltar Consulting Group relays the offer to the advisor.
  • Once an offer is accepted, Gibraltar Consulting Group issues closing documents.
  • The policy owner designates an irrevocable beneficiary for the agreed upon amount of the death benefit.
  • After Gibraltar Consulting Group receives the completed closing documents, the change of ownership and beneficiary forms are sent to the life insurance company.
  • Upon confirmation that the change forms have been processed by the carrier, any additional funds are released to the seller.

Establishing Best Practices

It has never been more important for advisors to understand the potential value of their clients’ assets and what opportunities are available. Sound financial management dictates that advisors appraise their clients’ holdings regularly. While providing advisors
with a new source of value for their clients, SWAPP also represents a powerful tool for enhancing relationships and growing an advisor’s business. Specifically, SWAPP encourages financial advisors to:

  • review a client’s portfolio on a regular basis.
  • help clients understand the market value of their policies.
  • assist clients in optimizing their life insurance.
  • suggest more efficient investment opportunities.

The Importance of Due Diligence

Secondary market transactions from Coventry are funded with institutional capital. Not only does institutional backing provide a secure funding source, it also provides a higher degree of consumer protection with regard to privacy and confidentiality.

It is always important for advisors to conduct their own due diligence to protect their clients’ interests. Advisors should work with a buyer that can demonstrate a strong track record of successfully completing transactions smoothly and efficiently. It is essential to verify that the firm holds the appropriate licenses for conducting business in the policy owner’s state and be sure that they are backed by institutional capital.

The sale of a life insurance policy is a taxable event. Sellers of life insurance policies should seek advice from their tax advisor based on their own particular circumstances.

Next Steps

To learn more about life settlements and other new options available through the secondary market for life insurance, call (646) 586-5721.