How to Generate Cash from Life-Settlement Insurance Market

While most people are familiar with annuities as an insurance related investment, very few people are aware of a compelling opportunity in a relatively new sector of the insurance market, secondary life-settlement market. A secondary policy is a premium-financed policy as it is not paid for by the insured or the insured’s beneficiaries. It is paid for with money advanced by a lender, who will charge interest on the loan that will be repaid out of the death benefit after the death of the insured. A secondary policy requires no out-of-pocket investment by the insured. These contingencies for insurance holders create an opportunity for well-to-do persons with no insurance who, upon attaining the age of 68-70, decide that they would like to have a life insurance policy but do not wish to pay the premium. They want the policy both for financial planning to tax purposes as well as for the sake of naming a beneficiary of the death benefit but do not wish to pay the premium. What can they do?

Instructions

Difficulty: Challenging

1. As is well-known, annuities create a stream of payments to an annuity-holder who has invested a lump sum, either on an immediate or deferred basis, into an investment vehicle. Typically, that investment vehicle is managed an insurance company and will often have a death-related pay-out in addition to the regular stream of payments during the annuity holder’s life time. In contrast to an annuity, a secondary life settlement policy is an actual insurance policy. It has a face value, called the death benefit that may be many times higher than the premium paid into it.
2. Premium-financed life insurance policy has been around for many years as part of the well-established whole life and universal life product sectors. The opportunity arises from the newly emerging secondary market for premium-financed policies. A secondary market enables the exchange of any financial assets -0 stocks, bonds have a secondary market, often but not exclusively on exchanges. Insurance policies are assets that may be sold or transferred with the participation or approval of the insured.
3. The secondary life-market involves banks and investors who will purchase a life-insurance policy of an elderly person with perhaps an eight or ten-year life-expectancy at a deep discount, perhaps 20 cents on the dollar. Since it is certain that than policy will eventually pay a benefit, these purchasers can amortize their total investment over many policies that will all pay off at different times but still within the general life expectancy of the broad population. Why would anyone holding a life insurance policy sell it for only 20 cents? It would typically be for one of two reasons. They have equity in the policy that finances the premiums but they need immediate money. Alternatively, they have littler no equity in the policy and cannot afford to pay the premiums.
4. Engage a program administrator with access to lenders, insurers and legal advice.
5. Following the direction of administrator, set up an Irrevocable Life Trust is established to hold the policy in the name of the beneficiary for the insured. There are two reasons for the trust. First, it allows the lender direct legal access to the proceeds of the sale or distribution of policy benefits to recover their loan and interest, thus allowing the policy to be used as collateral for the premium loan, and second, it allows death benefits to accrue to the beneficiary tax free as well as avoiding inclusion in the estate of the insured—another significant tax benefit. The policy will reside in the trust, which will then pay the premiums directly to the insurance carrier
6. The lender, a recognized financial firm or bank, loans the trust 100 percent of all associated loan premiums and interest. Collateral is the policy’s death benefit.
7. The insured may elect to sell policy after two years. Typical offers range in the 20 percent area. Transferable death benefit will pay off investors 100 cents on the dollar. Policy premiums plus interest, can be sold with the first two years deducted from sale proceeds.
   
   Or --
   
   Policy premiums plus interest deducted from death benefit to repay lender.
8. At any time from the date of policy issuance forward, were the insured to continue to own the policy and die, the death benefit minus premiums and interest would be paid to the policy beneficiary in full.

Tips & Warnings

• Engage a financial advisor to detail the estate and tax choices involved with secondary life settlement.
• The prevailing market for life-settlement policies is in the 10-20 percent area. Do not accept offers to enter a program that offer a fixed exchange in advance, especially if it is below that range.