What is a Life Settlement?
- Policy type
- Policy face amount
- Insurance company rating
- State of residency
- Policy premiums/year
- Age, gender and life expectancy of insured
Why Take the Life Settlemet "L.E.A.P."?
- It’s Legal – The legal basis for life settlements as a legitimate option for life insurance owners may be found in the Grigsby v. Russell decision from the U.S. Supreme Court in 1911, where it ruled that life insurance is just like any other private property you own and can therefore be sold.
- It’s Ethical – Advisors have a fiduciary obligation to provide their clients with all available information, choices and options.
- It’s Approved – As of 2019, 43 states and the territory of Puerto Rico regulate life settlements, affording approximately 90% of the United States population protection under comprehensive life settlement laws and regulations.
- It’s Profitable – On average, the purchase price is 4 times more than the Cash Surrender Value and if it’s a Term Policy, it might be worth more than the client spent over the lifetime of the policy.
What a Life Settlement is Not
- Stranger Owned Life Insurance (STOLI) – also referred to as “Stranger-originated life insurance” (“STOLI”) means an arrangement to initiate or facilitate the issuance of a policy for the intended benefit of an investor who has no “insurable interest” in the life of the insured. In the typical scenario, the insured either gets paid for their participation when the policy is originated or at the end of the two-year contestability period, with the investor becoming the owner and beneficiary. Many states have laws prohibiting STOLI transactions or are in the process of making laws to prohibit STOLI transactions.
- Investment opportunities – A Life Settlement is not a proposal to invest in the purchasing of policies. Melville Capital does not seek capital for investment purposes and we only transact with institutional investors who understand this marketplace. These investors are entities such as commercial and investment banks, hedge funds, pension funds and private equity funds. Be especially leary of any individual or institution seeking to invest in insurance policies to sell to individual investors.
How does the Life Settlement Process Work?
- Collection of application, policy authorizations and medical information (10-30 days)
- Complete Life Expectancy underwriting (5-7 days)
- Send complete case to funding entities
- Negotiate and obtain offers (10-15 days)
- Communicate value to owner
- Contacts are ordered, delivered to the policy owner or referral source (7 days)
- Review, sign and return of settlement contract package (7 days)
- Legal review by buyer and clean-up of any deficiencies (7-14 days)
- Escrow account opened and change instructions sent to carrier
- Record ownership and beneficiary changes by insurance carrier (7-14 days)
- Escrow company releases cash settlement to client (3 days)
What is the taxation implication of a Life Settlement?
- Proceeds received up to the tax basis (total premiums paid) are free of income tax.
- Proceeds received that are greater than the tax basis up to the amount of the cash surrender value are taxed as ordinary income rates.
- Proceeds received that are in excess of the amount from tier 2 get taxed as capital gains.
- Life Insurance Policy Cash Surrender Value: $195,000
- Total Premiums Paid by Policy Holders (Tax Basis): $175,000
- Amount Received in Life Settlement Transaction: $200,000
- Life Settlement Proceeds: $200,000
- Paid Premiums (Tax Basis): $175,000
- Taxable Income: $25,000
- Cash Surrender Value: $195,000
- Paid Premiums (Tax Basis): $175,000
- Amount taxed as ordinary income: $20,000
Is it Legal?
- According to the American Council of Life Insurers, 88% of Universal Life policies are lapsed or surrendered without ever paying a death benefit.
- Furthermore, it is believed that 90%+ of term life insurance policies are lapsed without ever paying a death benefit.
- A study by the London Business School showed that the average sale price is 4x’s the Cash Surrender Value offered by the insurance carrier.
- There is approximately $14.5 trillion of in-force policies in the U.S., with more than 10% owned by senior citizens.
- The Wharton Financial Institutions Center estimates that more than 20% of policyholders over the age of 65 hold policies whose economic values far exceed their cash surrender values.
- Studies conducted by two of the leading research organizations for the life insurance industry, Conning, Inc. and Matthew Greenwald Associates, estimate that approximately $500 billion currently qualify for Life Settlement transactions.
- According to a recent U.S. Government Accountability Office (U.S. GAO) study, U.S. policy owners received $5.62 billion more than the policy cash surrender values from life settlements over a 3-year period.
- According to Conning & Co., an independent analyst firm, the annual volume of life settlement transactions will average approximately $3 billion per year over the next decade. This is an established and growing industry.