| One of the most important aspects of advanced | | | | history. Because of this, an occasional smoker can still |
| estate planning is the secondary market for life | | | | be looked at as a "non-smoker" risk and be offered |
| insurance. But, like any other financial planning | | | | more affordable coverage. |
| strategy, it is not for everyone. The life settlement | | | | Once the policy is in force, underwriting of the client |
| has traditionally been used an exit strategy for | | | | is never revisited. This approach to pricing life |
| unwanted or unneeded life insurance that might | | | | insurance policies serves the insurance carriers, but |
| ordinarily be lapsed or surrendered. Now life | | | | does little for the consumer when the insured has a |
| settlements are being used with other strategies to | | | | change in circumstances. In fact, it only reinforces the |
| provide estate liquidity using alternative funding | | | | power of the carriers. The ability to purchase a life |
| methods, such as premium financing. | | | | insurance policy back from an insured is limited to the |
| Trusted advisors have a fiduciary responsibility to | | | | carrier that issued it in the first place. Their offer is |
| inform their clients of all of their options when | | | | the policy's cash-surrender value, which is based on |
| reviewing their estate plan. The fair market value of | | | | medical underwriting at the time of issue. Any change |
| life insurance should be at the foundation. Anyone | | | | in expected mortality that would increase the policy's |
| who ever bought or sold real estate knows the | | | | value can only be captured in the secondary market |
| importance of fair-market value. In recent years, our | | | | when medical underwriting gets revisited, allowing for |
| access to real estate equity has kept our economy | | | | a more accurate appraisal of the asset. |
| from screeching to a halt. | | | | A typical settlement application includes some very |
| Most of us probably breathe a sigh of relief every | | | | important information, which is used for the appraisal. |
| time we get our tax statements in the mail and look | | | | Basic questions concern the type of policy, the |
| at the assessed value. We know that the tax is a | | | | insurance company, and when the policy was issued. |
| percentage of the assessed value from a county | | | | The insured signs a The Health Insurance Portability |
| appraiser and we are thankful that it's not based on | | | | and Accountability Act (HIPAA) form. Under HIPAA, |
| fair-market value. But, we would likely see the largest | | | | the insured can share his or her medical history by |
| act of civil disobedience since the Boston Tea Party if | | | | authorizing a copy of their medical records to be |
| the county appraiser consulted the realtor every | | | | reviewed. This is where the most accurate and |
| year. We would feel slighted, to say the least, if we | | | | timely information concerning the insured's health |
| had to sell real estate for its assessed value instead | | | | status is used to assess life expectancy. The third |
| of its fair market value. Our equity is based on a | | | | piece of critical information that is reviewed is a |
| more accurate appraisal, which takes into account | | | | current illustration of the life insurance policy. It will |
| supply and demand imbalances, among other things, | | | | show the estimated cost to carry the policy to |
| and leaves us with more opportunities. | | | | maturity. The non-binding offer can be given to the |
| Now, another widely owned asset offers the same | | | | client once these variables are known. |
| opportunity for a more accurate appraisal of fair | | | | If the offer is accepted, the policy owner and |
| market value. The asset is life insurance. The | | | | beneficiary are changed to the institution making the |
| secondary market for life insurance is nothing new. | | | | offer, which assumes all premium obligations. The |
| Viatical settlements have existed in one form or | | | | insured gets the settlement proceeds once the |
| another for years. They are usually associated with | | | | changes have been recorded at the carrier. Any |
| investing capital in a fractional share of a policy in | | | | amount, up to the cost basis, is a tax-free |
| which the insured has a terminal illness. Generally, the | | | | return-of-premium. The amount above that, up to |
| insured has a life expectancy of fewer than 24 | | | | the cash-surrender value, is taxed as ordinary income. |
| months and is pursuing a tax-free portion of the | | | | Finally, the amount above the cash-surrender value, |
| death benefit to fulfill an immediate need for cash. | | | | up to the settlement amount, is typically taxed as a |
| Life settlements involve the sale of a policy by | | | | longterm gain since the policy must be at least two |
| someone over 65 who no longer needs, wants, or | | | | years old. (This tax opinion was issued in 1997 by |
| can afford the policy. The life settlement is often | | | | KPMG Peat Marwick.) |
| used as an exit strategy for under-performing | | | | Life Settlements as Conventional Wisdom |
| universal or variable life policies in which "vanishing | | | | The idea of using the secondary market to evaluate |
| premiums" have reappeared or the death benefit is | | | | life insurance is slowly becoming conventional wisdom |
| no longer guaranteed. These settlements are | | | | for many reasons. Most important is that household |
| transacted on all types of individual and survivorship | | | | names, such as The Bank of New York, GE Capital, |
| policies including term policies. The settlement | | | | and Lloyd's of London, have committed billions of |
| amounts are always in excess of any cash-surrender | | | | dollars to this market. This builds credibility for |
| value for the same reason that real estate is largely | | | | regulators and the public as the perception shifts to |
| bought and sold for more than its assessed value. | | | | recognize life settlements as a sophisticated financial |
| Traditionally, before a life insurance policy is issued, an | | | | planning technique. Many clients who are life |
| underwriter reviews the insured's medical records and | | | | settlement candidates would probably never purchase |
| makes an offer to the insured based on accepted | | | | investments without knowing all the facts and having |
| findings. Unless the case is declined, different offers | | | | a sound exit strategy. The time has come to |
| could be made including, preferred, preferred plus, | | | | determine the usefulness of life insurance, especially if |
| standard, table 2, and table 3, etc. | | | | the premiums have become a financial burden to the |
| Companies using the term "clinical underwriting" to | | | | policy owner. The liquidity that the secondary market |
| assess mortality risks on an individual basis imply that | | | | provides can only enhance the value of life insurance |
| their underwriting is more accurate at the time of | | | | by increasing demand in the primary market. Also, a |
| issue. This benefits consumers in the same way | | | | more accurate appraisal of the asset is the key to |
| settlements do at the outset by taking a more | | | | unlocking the hidden value for the benefit of the |
| individual approach to assessing an applicant's medical | | | | consumer. |