Life Settlements to Tap the Value of Hidden Assets
assets are more likely to be lost, left unaccounted for,
or simply assumed to be valueless than life insurance. Often
purchased as an asset of a corporation, it is often used
to protect the company’s interest in a key employee
or outside director. As corporations evolve, ownership changes,
interests diverge, and many life insurance policies can
the past, the owner of a life insurance policy who no longer
wanted to retain the contract had two options: allow it
to lapse or surrender the policy. When a term policy lapses,
the policy owner receives nothing. When a permanent insurance
contract is surrendered, the net cash value is paid to the
option can tap the hidden value of these policies. Under
the right circumstances, life settlements provide value
in excess of the cash value built up within these policies.
In many respects, it works like found money for a company
or individuals who might otherwise simply walk away from
a policy rather than continue to pay premiums.
are limitations to when and for whom life settlements apply.
The strategy works best when the insured has less than a
12-year life expectancy, has had a change in health since
the policy was purchased, and the policy can be enhanced
for the purpose of its sale. In select circumstances, however,
life settlements provide a win-win way to receive value
in excess of the simple cash value of a policy, while gaining
a tax advantage and putting more cash into a business, an
acquisition, or an individual’s retirement.
A $35 million hotel holding company decides to acquire a
smaller, $12 million operator. The smaller company has two
shareholders, both in their late 70s, in failing health,
with no effective succession plan. The company owns two
$6 million universal life insurance policies, one on each
shareholder. The owners’ exit strategy was to use
the insurance to purchase the other’s outstanding
shares, if one was to die. Each policy has a cash surrender
value of approximately $400,000. The sellers each want $6
million in cash from the transaction. The buyer has only
$3 million. Where would the balance come from?
could show the seller that selling the policies under a
life settlement would generate $2 million of immediate cash.
This is not enough to close the gap entirely, but the remaining
$1 million difference could be financed over two to three
years. The transaction would not work without the infusion
of cash from the life settlement.
The 75-year-old patriarch of a regional family-owned hotel
developer retired five years ago, leaving the enterprise,
valued at $10 million, to his two sons. His retirement was
to be partially funded through an ongoing salary from the
company in order to compensate him for serving as chairman
and as a consultant to the business. Once the father is
out of day-to-day operations, however, the sons begin squabbling
and the business begins to fail. Cash flow dries up, and
the sons cannot afford to continue funding their father’s
million universal life policy that they hold on their father’s
life is in danger of lapsing because they cannot afford
to pay the premium. The alternative to letting the policy
lapse is to sell the policy to a funder for 30% of the face
value, recovering $1.2 million to help fund the father’s
Friedman is president of CFS, Inc., and Innovative
Underwriters Inc. She can be contacted at (800) 4-INSURance.