Although life settlements often play a role in estate and retirement income planning, some settlement executives note that there are other reasons that people to look to their life insurance policies to generate needed funds.
They point to life settlements as the potential solution to a range of problems, not only for those owning a policy but also for entrepreneurs with a pressing need for cash in the midst of a recession.
In the current economy, it is often a challenge to find the money to finance a new business or to provide capital for improving an existing company’s profitability, industry executives observe. For business owners facing a shortage of investors willing to put money directly into their company, settlements may be a practical path to needed capital for diversification, expansion or simply to keep operations running, they say.
Robert Settlow, managing partner, Life Settlement Company of America, Livingston, N.J., says his company recently handled a case where a 74-year-old business owner wanted to get cash out of a $4 million term policy, convertible to universal life, which the company had taken out on him as key-man insurance.
The policy no longer was needed because he was slowly pulling out of the company and preparing to turn it over to his sons. Because the recession had hurt sales, the company needed an infusion of cash. Ultimately, the owner’s accountant contacted Settlow’s firm.
In November, the owner and his company concluded a deal with the Life Settlement to convert the term policy to UL insurance and sell it to investors.
The policy fetched the company $350,000, which the sons have been putting into the business to cover operating expenses. Further strengthening the company’s balance sheet is the fact that selling the policy eliminated the cost of premiums that the company had been paying, Settlow notes.
There have also been creative uses of settlements on the buyers’ side. Rather than being used strictly as a hedge for investors, settlements can be part of an intricate financial package.
For instance, Larry Simon, president and chief executive officer of Life Settlement Solutions Inc., San Diego, reports that he has seen life settlements used in combination with other financial products to provide crucial backing for some business deals.
For instance, he says, investors may take out a loan for, say, $100 million to back a deal. To guarantee the loan, they can buy packages of existing life insurance policies whose total face value exceeds the amount borrowed. Loan proceeds can then be placed in other investments, such as real estate, to produce the cash flow needed to pay premiums on the policies purchased for the settlement.
Life settlements may seem like an exotic investment now to many. But settlement firms are saying that businesses beyond Wall Street as well as policy owners may be finding new and resourceful uses for them as this industry’s asset base grows.