Settlements: An Insurance Planning Tool
settlements are a new insurance planning tool for older individuals
in which a third party, preferably institutionally funded,
purchases a senior’s existing life insurance policy
for more than its cash surrender value (CSV). Life settlements
are especially valuable when used for trustees.
shows examples of life settlements that would have been
very costly to the insured had they been dropped or surrendered.
There is no set percentage of face amount paid. The offer
is determined by the policy’s premium amount, the
type of policy, and the age, health, and life expectancy
of the insured.
settlement is not a viatical. Viaticals are purchases of
policies of the terminally ill with a life expectancy of
two years or less. Life expectancy on life settlements can
be up to 15 years, depending upon the company purchasing
looking at existing life insurance policies, the following
situations may be possibilities for life settlements: business
succession; trust administration; estate or financial planning;
commercial lending; bankruptcy; divorce; charitable giving;
and discontinued employee or executive retirement programs.
example, consider the use of life settlements in the sale
of a business in which an otherwise tenuous deal was accepted.
The offer to purchase the company fell $1 million short
of the desired sale price. The corporation owned $10 million
of key person life insurance, and most of the policies were
term. The cash surrender on the permanent portion of the
policies was $800,000. All policies were submitted for an
appraisal, and a life settlement offer of $3.5 million was
obtained. With an extra $2.7 million from this source, the
company realized they would get more than their original
target amount. They accepted the offer to purchase the company.
another case, a company was sold and its advisor allowed
the key person life insurance policy, which was term, to
pass to the purchasers of the company as part of the assets.
The purchasers of the company were able to sell the policy
for a very substantial amount, because they knew about the
potential value of life settlements. The advisor’s
errors and omissions insurance had to pay the original owner
to settle a claim arising from the advisor not obtaining
the value of the policy for his client.
carried on the books as “no value” and ready
to be dropped may turn out to be worth a great deal in a
life settlement. Term policies can be considered and have
been purchased. Other types of policies that can be purchased
include universal, whole life, variable, and group. Policies
can be owned by individuals, trusts, and companies.
insurance coverage is still needed and a policy is performing
poorly or its premiums have become unaffordable, a specific
program may be used with a life settlement to replace coverage
while getting cash out of the old policy. Consider an 80-year-old
woman who sold a $5 million policy. She put $708,000 in
the bank after purchasing another $5 million policy with
a premium that was guaranteed for 10 years and a guaranteed
payout of $5 million at death or the end of the 10 years.
She also went from an approximate $150,000 premium on the
old policy to a $92,000 premium on the new policy.
formulas may be used to determine the value of a policy,
depending upon the company making the appraisal. It is possible
that one or more companies may not make an offer and other
companies may give varying offers. To ensure the best offer
for the client, a life settlement broker can take the case
to several companies.
are also creative premium financing programs that require
little or no posting of collateral. Other specialty programs
include access to funders that will buy long-life expectancies,
hard-to-place cases, and entire large face-value policies
(many funders have caps).
institutional funders are world-recognized financial institutions,
not self-created companies or trusts that hold investment
capital. Institutional funders provide safeguards for advisors
and their clients, including institutional escrow agents
and policies held in pools, not resold. It is important
to know who is holding the policy.
circumstances change, the ability to obtain cash from the
sale of a life insurance policy can be extremely valuable,
offering an opportunity for both the advisor and the policyholder.
Greenberg is the owner of Valerie Greenberg and Associates,
a life settlement brokerage in Michigan. She can be reached
or (248) 548-1086.