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Life Settlements Transition to Financial Planning

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It used to be that any client over age 65 was a life settlement candidate. The sales pitch was fairly simplistic: sell your current policy for more than the premiums paid in and utilize the proceeds to purchase a replacement policy with lower premiums or better features. With acceleration from 2006, investors clamored over this alternative investment class, creating a rich seller’s market with robust policy valuations. Unfortunately, this period proved to be a valuation bubble and the life settlement market has since retrenched.

This year we found demand for policies increasing as investors returned to this asset class, though with more discipline and conservative underwriting pricing. Much has been written about the purchase criteria for policies investors seek today. Less obvious has been the change in the salespitch to selling customers. Life settlements are much more than a simple salespitch. Life settlements are a solution worth considering in response to specific challenges facing the customer. As such, life settlements have become a strategic tool in financial planning. There are common themes among the clients who turn to life settlements. Most transactions are related to changing planning priorities or a need for liquidity. Here, we take a look at a few case examples.

Changing planning priorities

Divorce — While it is likely the original planning need may shift when a divorce occurs, often the divorce decree requires coverage be maintained for a specific period of time. When considering a life settlement in this situation, one must ensure the cooperation of the ex-spouses, who are typically the owner and insured.

This case example is a divorced couple who have agreed to amend their divorce agreement to allow for a life settlement transaction, and who are currently negotiating the split of the proceeds:

  • Policy: $2 million universal life (UL), issued 2007
  • Insured profile: Male, age 66, life expectancy underwriting: 121 months and 139 months
  • Offer price: $370,000

Estate planning — A plan can be the best choice made at a moment in time. But life is fluid, and plans must be reviewed regularly to ensure they continue to match the best choices in the current environment.

See also: Business Changes Can Mean Life Settlement Opportunities

In one case, as the result of a recent review, the advisor recognized excess coverage at the death of the first spouse but a lack of adequate coverage for the estate at the death of the second spouse. To fill this gap, the advisor recommended purchasing a new survivorship policy. To fund the new coverage, two of six individual policies were sold. This effectively shifted coverage from the death of the first spouse to the death of the second:

  • Insured profile: Male, age 78, life expectancy underwriting: 107 months and 82 months
  • Policy 1: $2 million, convertible term, issued 2002
  • Sale price: $373,000
  • Policy 2: $1.5 million UL, issued 1994
  • Sale price: $563,000

When liquidity is a priority

Current income vs. estate protection — When faced with an increasing need for current income, individuals consider their assets and expenses closely. In this case, the client’s advisor recommended reducing the amount of in-force insurance and purchasing an annuity product to ensure an ongoing income stream. The client sold just more than half of his insurance, allowing him to purchase a larger annuity product than would have been possible with a simple surrender:

  • Policy: $350,000 UL, issued 1997
  • Insured profile: Male, age 78, life expectancy underwriting: 107 months and 70 months
  • Sale Price: $127,400

Affordability — Unfortunately, one of the most common life settlement scenarios is when individuals have difficulty managing the premium required to keep coverage in force. In this case example, the policy owner was able to sell one of his policies to ensure he had the funds to continue supporting the remaining $3 million in coverage:

  • Policy profile: $588 million UL, issued 1993
  • Insured Profile: Male, age 85, life expectancy underwriting: 52 months and 48 months
  • Sale Price: $2.5 million

Affordability, with an ongoing need for coverage — In addition to the need for liquidity, we see cases where the client cannot afford the premiums but very much desires to keep coverage. A client found herself in this position when rental income from investment properties faltered. Since the insured had experienced health changes, the family did not want to part with coverage. The solution was the sale of two policies to an investor who allowed the family to keep an irrevocable beneficial interest in the policies. The details were:

  • Policy profile: Two $1 million ULs , issued 2007
  • Insured: Female, age 87, life expectancy underwriting: 105 months and 76 months
  • Sale price: Retained death benefit in:
    • Years 1-3, $650,000
    • Years 4-6, $500,000
    • Years 7 to Maturity, $400,000

Incorporating life settlements into a financial planning practice can increase options for clients faced with changing needs or difficult financial times. Client situations today can be more complex in their challenges and strategy. As demonstrated in the examples above, life settlements can become a key component to a planning strategy as life’s priorities shift over time. Certainly life settlements have transitioned to an important financial planning tool.

Cynthia Poveda is vice president, secondary markets solution center, with Crump Insurance.

For more on life settlements, see:

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