Using Life Settlements To Achieve Charitable Giving Goals

As their trusted advisor, your clients rely on you for innovative insurance, financial and estate planning options, including assisting them realize their charitable giving objectives. The life settlement is a powerful new tool that allows you to help your clients maximize the full potential of their life insurance policies.

A life settlement is the sale of an existing life insurance policy for a lump sum of cash that is less than the policys face amount but more than the cash surrender value. A life insurance policy is property, like a car, house, stocks and bonds that can be legally sold in accordance with applicable laws.

Through a life settlement, a policy owner can realize value today from an asset that is generally thought to only have a benefit when the insured passes away.

How can a life settlement be used in your clients charitable gifting program? There are many variations and complex estate and tax planning strategies that can be employed when utilizing life settlements in a charitable gifting program. However, in its simplest terms, the owner of a life insurance policy can either sell the policy and give the proceeds of the life settlement to the charity or give the policy directly to the charitable organization that, in turn, immediately sells the policy for a lump sum of cash through a life settlement.

The income tax ramifications associated with each transaction are different. A tax professional should be consulted as to the most appropriate strategy for the clients specific situation.

Do any of your clients own a life insurance policy that meets the following criteria? The policy:

–Insures a person over age 65 or who has a serious illness?

–Has a face value of at least $100,000?

–Is at least two years old?

–Provides insurance coverage that is no longer needed or wanted?

If so, then the policy may be eligible for a life settlement.

Consider the following example as one way in which a life settlement might be used to help your clients maximize the potential of their life insurance.

Due to a significant decrease in her net worth because of the stock market downturn, your client regretfully must decline to contribute to her favorite charity at the same level that she has in past years. She neither wants to deplete her cash reserves nor lose any income-producing assets.

Her estate planning attorney advises that because her net worth has declined, her need for life insurance to cover estate tax has declined as well. Therefore, a $500,000 Universal Life policy obtained to pay estate tax is no longer necessary and surrender is considered.

The life insurance policy is submitted to a life settlement broker for appraisal and has a market value of $175,000. Your client decides to pursue a life settlement. She was pleased to be able to donate $50,000 to her favorite charity, buy an annuity and take her grandchildren on a vacation to Disney World with her $175,000 cash proceeds.

Some of your clients may be thinking about surrendering their life insurance policies or simply allowing them to lapse. Now these unfortunate events can be turned into win-win-win situations for you, your client and their favorite charity. (See sidebar.)

How does a life settlement work? First, the life insurance policy should be appraised. A life settlement broker can determine the policys eligibility for a life settlement and will seek to obtain the highest possible offer for the policy.

The value of a life insurance policy is determined by a number of factors, including, but not limited to, the age and medical condition of the insured, type of insurance policy, rating of the issuing insurance company and amount of premium payments to keep the policy in force. Most types of insurance policies can qualify, including universal, whole life and converted term.

When a mutually agreed upon price is determined for the life insurance policy, the owner is paid a lump sum in cash, the ownership and beneficiary rights are transferred to the purchaser, all future premium payments are the responsibility of the purchaser and upon the death of the insured, the death benefit is payable to the purchaser.

A number of studies have been conducted about the life settlement industry. Among these are the 1999 and 2003 reports by insurance industry researcher Conning and Co. and the 2002 Wharton School, University of Pennsylvania study.

Conning and Co.s 1999 study found that more than $490 billion of life insurance was in force insuring the lives of Americans over the age 65 with nearly $108 billion eligible for a life settlement.

The Wharton School white paper, “The Benefits of a Secondary Market for Life Insurance Policies,” authored by Neil A. Doherty and Hal J. Singer, compares the emerging secondary market for life insurance policies to other financial services industries with robust secondary marketshome mortgages, catastrophic risk insurance and NASDAQ-listed securities.

As of August 2003, 19 states have enacted statutes addressing the sale of life insurance policies insuring nonterminally or chronically ill individuals and an additional 16 states have laws that only regulate the sale of life insurance policies insuring terminally or chronically ill individuals. Fifteen states currently do not regulate this transaction.

The National Association of Insurance Commissioners and National Conference of Insurance Legislators have developed model acts that can be used as templates for new legislation in states deciding to regulate this marketplace. Most legislation has licensing, disclosure and reporting requirements.

Jolene D. Fullerton, is general counsel of First Secured Life, LLC., Ft. Myers, Fla. She is a former director and vice president of the Viatical and Life Settlement Association.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.