Life Settlements

Understanding Business Uses for Life Settlements
by Scott Kirby

We have heard from a number of producers over the past year who want to expand their referral networks to build their life settlement practice. Many insurance professionals and financial advisors recognize that insurance agents, financial planners, CPAs, and attorneys are excellent sources for life settlement referrals. The most recurring question is, “How can I convince financial professionals that a life settlement could be a viable option for their clients?”

There is a direct connection between financial professionals who serve high net worth seniors and life settlements. However, CPAs or attorneys with large corporate clients may not be aware of some business uses of life settlements.

An active and rapidly growing secondary market for life insurance, which emerged less than 10 years ago, already represents a challenge to conventional industry practices and offers a new dimension to estate and financial planning. The secondary market helps enhance the asset management options available to advisors and their senior clients. It also redefines the liquidity and asset value of the life insurance asset class for these policyowners.

Becoming Familiar with Life Settlements

Financial planners, CPAs, and attorneys should take the time to understand how a life settlement can be an effective wealth management tool for seniors and business clients. Life settlements can make sense for sellers who no longer need coverage or want to pay premiums. Selling an unwanted policy is becoming a financial management tool for older people who don’t want to rely on children for financial support or are trying to find money for costly long-term care insurance. As client’s reach certain milestones, they realize that, when certain financial situations arise, having money now can be more important than having money later.

Case Example
We recently transacted a life settlement, which involved a buy-sell agreement for a family owned business. The company needed cash to pay down debt and increase shareholder dividends. Two elderly sisters were major company shareholders. They held $3 million in life insurance, which was purchased to fund a buy-sell agreement.
The 87-year old sister carried a $1 million life insurance policy with a cash surrender value of $7,297. The 82-year old sister had a $2 million policy with a cash surrender value of $141,262. Their life insurance agent recommended getting a life settlement on each policy to address the company’s financial objectives.

We were brought in to broker the policies on the secondary market. The life settlement on the older sister’s $1 million policy was $394,262, which was $386,965 more than the cash-surrender value. The life settlement on the younger sister’s $2 million policy was $300,000, which was $158,738 more than the cash-surrender value. By liquidating the buy-sell agreement, the company got $545,703 in found money to meet immediate financial needs.

Key-Man Policies

One of the most common business applications for a life settlement is a company-held key-man policy that insures the life of a departing older executive. Instead of simply surrendering a policy for the cash-surrender value, the company can use a life settlement to get additional proceeds to use in a variety of ways, such as eliminating debt, freeing up funds for capital investment, or creating a severance package for the departing key-man. Using this outstanding new option is an excellent way to create found money from a resource that might have otherwise gone untapped.

Key-man insurance, which has been around since the 1960s, has been used in a variety of ways. Venture capitalists may require key-man insurance when one person’s creative or engineering skills are paramount to the venture’s success. Many large corporations insure the bulk of their management staff to protect themselves from the rough transitional phases associated with the loss of a key employee
In conclusion, the life settlement industry is full of opportunities. Financial professionals have a book of business that is full of life settlement candidates who have not been informed about how a life settlement can be a viable option. Getting a life settlement may be the best decision for your client if the premium payments are becoming a burden, a key-man is retiring, or the policy is on the verge of lapsing. A life settlement could be what helps your client achieve their financial objectives in 2008.

Clients should be informed about the life settlement option as an effective exit strategy from an unwanted life insurance policy. As a financial professional, it is your fiduciary duty to present all options to your clients and a life settlement is definitely an option worth looking into.

Also, please note that the number of bidders for a policy may be limited and the proceeds from sales of similar policies may vary and may be subject to claims of creditors. Receiving the proceeds may affect eligibility for government benefits and entitlements. Before the sale, the insured should consider the continued need for coverage, the affect on estate plans, availability of insurance, cost of comparable coverage, and tax implications. In addition, there may be high fees associated with a life settlement sale. The examples above are no guarantee of future sales. The amount received for the sale of the policy may be more or less than what others might receive for the sale of a similar policy.
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Scott Kirby is a co-president of Advanced Settlements, Inc. For more information on life settlements call 800-561-4148 or visit www.advancedsettlements.com.