Over the past 18 months, the number of professional advisors engaging in life settlement transactions has nearly doubled. In addition, more CPAs and attorneys are entering the arena due to the product’s use in the estate planning process.
On the consumer side, satisfied seniors who have sold policies are spreading the word, and other seniors who are hearing about the option are beginning to ask their advisors about it.
Although seniors are learning about life settlements, life settlements are still relatively unknown in the nonprofit arena. Donated life insurance policies have been part of deferred giving programs for more than a century. College foundations and community foundations are particularly popular with those wishing to donate sizable life insurance policies. However, charitable organizations regularly encounter situations in which the donor no longer wants to pay the policy premiums. In those situations, charities opt for the cash surrender value.
With the arrival of the secondary market for life insurance, readily accepting the cash surrender value for an at-risk policy is no longer the most prudent course of action.
Consider this example: a large community foundation that has been gifted a $4 million second-to-die survivorship policy. Following the donor’s death, the spouse is unable to maintain the premiums, and the community foundation considers surrendering the policy for $474,000. Instead, an insurance agent working with the family suggests a life settlement so as to maximize the donor’s charitable legacy. The charity opts for the life settlement and receives $1.395 million–nearly 3 times the cash surrender value.
If there is hesitancy on the part of charities to embrace life settlements, it may be due to confusion over whether the product is related to controversial transactions involving investor-owned life insurance, stranger-owned life insurance, and life insurance and life annuities-based certificate transactions. The differences between IOLI, SOLI and LILAC transactions and a life settlement are substantial.
First, a life insurance policy is an asset that may be gifted or assigned through a process similar to the process used to transfer real estate or financial investments. A life settlement is the sale (transfer of ownership) of an unwanted life insurance policy. In most cases, the seller is at least 70 and has a policy with a value of at least $250,000. Life settlement prices are often about 300% of the cash surrender value.
Suppose Jane Doe wishes to donate her policy to a charity. She must assign ownership and name the charity as beneficiary. Once the charity owns the policy, 2 situations could occur:
==Doe may decide that she would like to see the policy’s current market value applied immediately toward her charitable cause.
==The charity may discover during the course of an annual review that a donated policy is underperforming or is in danger of lapsing. With the consent of the insured donor, the charity may pursue a life settlement.
It is important to note that, in either situation, it was the insured senior who owned the policy, and who initiated the gifting of the policy to the charity.
In the case of IOLI, SOLI and LILAC arrangements, the mechanics are quite different.
In those situations, it is the charity or investors who originate the purchase of life insurance on the lives of donors. The charity may set up a trust and sell interests to investors. The funds raised may then be used to purchase annuities on the lives of the charity’s donors, and the income from these annuities may be used to purchase life insurance on the lives of the same donors. In some instances, the charity becomes only a residual beneficiary, while the investors receive the proceeds from the death benefit. These arrangements have generated much controversy due to the fact that they may involve third-party investors with no insurable interest in the life of the insured, and because some regulators believe that such transactions turn life insurance into an investment commodity.
Insurance and professional advisors who interact with nonprofits should take the time to educate the charity about the value proposition of life settlements. Once the decision is made to pursue a life settlement, it is important that the charity, or the agent representing the charity, works with a reputable life settlement broker to pursue multiple offers to receive the highest possible value.
Sean McNealy is co-president and Marlene Frith is chief marketing officer of Advanced Settlements, Inc., Orlando, Fla., a life settlement broker. McNealy can be reached at [email protected] Frith can be reached at [email protected]
Why would a planned giving client sell a life insurance policy?
Because the client:
==Wants to give cash to a charity right away.
==Is worried about the policy’s investment performance.
==Has trouble paying the policy premiums and is earmarking policy benefits for a charity that cannot pay the premiums or get a loan to keep the policy in force.