Life Settlement Guide
A life settlement is a financial transaction in which a senior
citizen possessing an unneeded or unwanted life insurance policy
sells the policy to a third party, as opposed to surrendering it
back to the life insurance company. The seller receives immediate
cash for the policy from the purchaser. The entity purchasing their
policy becomes the new beneficiary of the policy at maturation and
is responsible for all premium payments from the time of the purchase
until the seller passes away.
Generally speaking, many policy owners who are the sellers in life
settlement transactions are unfamiliar with this option until
a financial professional mentions the option to them. This particular
type of transaction has not yet become a mainstream financial product
like stock and bond transactions, though in the past few years the
positive industry growth and attention from high-profile proponents
such as Warren Buffett, former U.S. Representative Bill
Gradison, and The Wall
Street Journal has created much interest in the industry.
A recent overview of the life settlements market can be found in the
2005 Industry Outlook compiled by major industry firm Maple Life Financial.
A survey found on page 4 of this publication found that almost half
of all responding advisors had senior clients who had surrendered
a life insurance policy for the cash surrender value (in the case
of a term life policy, the surrender value is $0) when many of these
clients could potentially have qualified for a life settlement. Many
are beginning to speculate that offering life settlements should
fall under the fiduciary duty of a financial advisor.
How Life Settlement Works
In a life settlement transaction, there is a chain leading from the
seller of the policy to the end buyer of the policy (known as a life
settlement provider.) Each link in the chain has a different responsibility
in facilitating the transaction and ensuring that it runs smoothly,
while outside vendors typically assist the provider with specialized
Senior citizens selling their policy generally are over
55 years of age, have a calculated life expectancy of between two
and twelve years, and have experienced a health change that usually
cause their insurance premium payments to rise. This undesirable scenario,
often coupled with increasing health care and/or nursing home care
costs, makes a life settlement an attractive option to many seniors.
There are certain restrictions for their policies as well - policies
must be valued at $100,000 or more, and must be either universal
life, whole life, or convertible term contracts.
Senior clients often discuss life settlement transactions with their
financial advisors instead of conducting the transaction on their own,
since their advisors are usually much more familiar with this non-mainstream
financial product. Some examples of advisors that are becoming increasingly
involved in the life settlement arena are:
- Attorneys (especially Elder Law Attorneys)
- Financial Planners/CFPs/ChFCs/CFCs
- Estate Planners/CEPs
- Certified Senior Advisors/CSAs
- Charitable Trust Officers
The decision to work with a broker is up to the client, since
financial advisors can submit the client's case to the life settlement
provider directly. However, in an industry where market value for life
insurance policies is not common knowledge, brokers typically do the
best job of obtaining fair market value for a senior citizens policy.
By submitting life settlement cases to multiple providers, they are
able to obtain a greater number of bids overall, and help facilitate
negotiations between high bidders.
Life settlement providers are responsible for paying the client
a cash sum greater than the policy's cash surrender value. The
top providers in the industry fund many transactions each year and
hold the seller's policy as a confidential portfolio asset, and do
not make it available to outside investors. They also have in-house
compliance departments to carefully review transactions, give seminars
to both financial professionals and senior citizens about life settlements,
and most importantly, they are backed by institutional funds from
a major bank.
Other Involved Parties
- Underwriters - Provide life expectancy estimates on the insured
for pricing purposes.
- Funding Sources - Banks that provide institutionally funded firms
with cash for payments.
Steps In A Transaction
- Senior citizen with financial needs consults with an advisor, decides
to sell his or her policy.
- Client & advisor select a broker who works with institutional
- Broker submits case (and client releases medical information) to various
- If policy meets criteria for a life settlement, providers send
offers to the broker.
- Client accepts their preferred offer.
- Client and advisor complete the provider's closing package, and
return essential documents.
- Provider places cash payment in escrow and submits change of ownership
forms to the insurance carrier.
- Paperwork is verified and funds are transferred to the policy seller.