Your SlideShare is downloading. ×

Life settlements basics 2008


Published on

  • Be the first to comment

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

No notes for slide


  • 1. Transforming life insurance into a performing financial asset. Life Settlements emerging financial alternatives for a new landscape
  • 2.
    • What is a Life Settlement?
    • Case study
    • Options for unwanted policies
    • Who buys these policies?
    • How does it work?
    • Market potential
    • History of Life Settlements
    • Industry statistics
    • Who and Why …. Market demographics and drivers
    • Fiduciary responsibility
    • Definitions and distinctions
    • Valuation of a policy for settlement
    • Licensing and regulation
    • Candidates for Life Settlements
    • Getting started
    • The Settlement Process
    • Rescission period
    • Tax implications
  • 3.
    • A life settlement is simply another option available to the insured when he or she finds that they no longer need, want, or are able to afford a policy.
    • Life settlements have become a significant emerging asset class and market issuance of Life Settlement asset based bonds totaled an estimated $23 billion by year-end 2005, a rise from $13 billion in 2004, according to research by Sanford C. Bernstein LLC, New York.
    • A life settlement is generally defined as the purchase of a life insurance policy for a lump sum that is greater than the policy’s cash surrender value, but less than its face value (death benefit). Life Settlements refer to insurance policies held by seniors - a man or woman age 65 or older.
    What is a Life Settlement
  • 4.
    • Mr. Smith is a 78-year old male
    • The policy - $1,000,000 Face Value UL
    • Cash Surrender Value - $40,000
    • Settlement amount/ cash received by Mr. Smith, $210,000
    • Mr. Smiths’ premiums had become unaffordable on his fixed retirement income. In addition to this, Mr. Smith had taken out the policy years ago to safeguard the financial well-being of his wife who had since died. His main concern was now investing part of the proceeds of his settlement into long term care insurance.
    • Quite simply, because Mr. Smiths’ life expectancy at age 78 was different than what the insurance company had originally factored into his policy, he was able to realize greater value on the secondary market for his unneeded policy; essentially arbitraging its value today against when the policy was issued.
    Case Study
  • 5.
    • Cash Values for the three options available to a
    • policy owner in the case of Voluntary Termination…
    • Lapse
    • Complete and total forfeit of policy,
    • once all cash value has been depleted by using the
    • policy’s accumulated cash in order to make premium
    • payments until coverage of the insured is canceled.
    • Surrender
    • Selling the policy back to the issuing insurance
    • carrier for an amount predetermined and represented
    • as the Cash Surrender Value (CSV).
    • (values may differ, life settlements are particularly attractive for those policies which have a depleted CSV)
    • Life Settlement
    • A life settlement offers increased value to the insured,
    • where not long ago none was thought to exist.
    • This diagram illustrates a scenario wherein the life settlement value
    • has exceeded the CSV. This equation is paramount in considering a life settlement
    • Over other options such as cash surrender of the policy.
    Options for unwanted policies
  • 6.
    • In a life settlement the purchase of a policy by an institutional investor is normally used to diversify their investment portfolios. This has led to the emergence of a relatively new asset class in the bond market.
    • Policies are often bundled into hedge funds by
    • institutional investors and pension funds to
    • diversify risk.
    • Bond issuance in this asset class has risen to an
    • estimated $23 billion in the US and Europe for 2005
    • according to research by Sanford C. Bernstein LLC.
    • Recent estimates by the New York Times indicate that the industry will grow to reach $150 billion per annum in bond issuance based on face value in the next few years.
    Who buys these policies?
  • 7.
    • When a policy is purchased, the dynamic between the policy holder, now the Institutional Investor, stays very much the same as it was before the purchase in as far as the contractual obligation between the policy owner and the issuing insurance carrier.
    • The seller collects a lump sum in excess of the policy’s cash value and of course is no longer responsible for premium payments.
    • The buyer has now taken over the contract which should bare a large payout in the future.
    • The insurance carrier keeps the policy in force and continues to collect premiums from the new policy owner.
    How does it Work? Policy Owner Insurance Carrier Premiums Death Benefit Nominal life insurance dynamic Institutional Investor Policy Owner Insurance Carrier Policy Cash Settlement Premiums Future Benefit Life settlement dynamic
  • 8.
    • Voluntary Termination Rates (Lapse or Surrender)
    • for life insurance Policies.
    • (ACLI Life Insurance Fact Book)
    • In 2005; Of the $18.4 trillion in life insurance coverage in the United States an approximate $1.2 trillion will lapse or be surrendered.
    • (ACLI Life Insurance Fact Book)
    • It is estimated that over 20% of policy holders over the age of 65 hold policies whose value on the secondary market exceed Cash Surrender Values.
    • (Wharton Study on Life Settlements)
    • Total value of life insurance held by seniors is $492 billion,
    • making the potential market for Life Settlements $100 billion.
    • (Wharton Study on Life Settlements)
    • The over 65 demographic is growing at over 3X the rate of
    • the rest of the nation within the next ten years.
    • (US Census Bureau)
    Market Potential
  • 9.
    • 1911- A milestone for the future life settlement industry
    • was the Supreme Court ruling on Grigsby v. Russell which
    • established the policy owner’s right to transfer an insurance policy.
    • Justice Oliver Wendell Holmes wrote “life insurance has
    • become in our days one of the best recognized forms
    • of investment and self-compelled saving.”
    • This opinion placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as stocks and bonds. As with these other types of property, a life insurance policy could be transferred to another person at the discretion of the policy owner.
    • 2001- A second milestone for the industry was when The National Association of Insurance Commissioners (NAIC) took a crucial step by releasing the Viatical Settlements Model Act defining guidelines for sound business practices.
    History of Life Settlements
  • 10.
    • Majority of policy owners either lapse or surrender their policies (National Underwriter Magazine, September 2004)
    • Approximately $100 billion annually in lapses (65+ demographic alone)
    • (Derived from 1.2 trillion annual lapse rate as estimated by ACLI Life Insurance Fact Book )
    • It is estimated that 88% of Universal Life in-force never results in a death benefit
    • and that 40% of all issued life insurance policies lapse at some point.
    • Only 1% of Term policies result in death claim (Jim Connolly, National Health and Financial Services, 2004)
    • 76% of seniors polled owned life insurance in 2005,
    • 64% of seniors polled owned life insurance in 2006;
    • (Senior Market Advisor Survey 2005 and 2006)
    • This12% delta between 2005 and 2006 is not representative of death claims
    • paid to seniors, which were in the single digits.
    • (Lawrence B. Patterson Insurance News Net March 2006 )
    Industry statistics
  • 11.
    • 1035 exchange Vs. Policy Arbitrage (leveraging Life Expectancy)
      • Policy could have more value if sold and used to fund new policy
      • rather than exchanged via 1035.
      • Seller has opportunity to finance new policy in lieu of one that may be underperforming.
      • If used to fund new policy, be sure that insurance agent first gets pre approval for new policy.
    • Voluntary or Involuntary Surrender
      • Policy lapse for non-payment.
      • Change in status of beneficiary (s).
      • Premiums no longer affordable.
      • Cash needed for retirement or Long-Term care
    • Key-Man
      • Left company, retired, policy unneeded.
    • Estate Planning
      • Changes in Estate Tax laws.
      • Changes in valuation of balance-sheet assets.
    • Philanthropic
      • Policy donated to a Charity for settlement,
      • possibly offering an enhanced tax deduction.
      • Sanford and Bernstein
    Who and Why…. Market demographics and drivers
  • 12.
    • What do life settlements mean to an insurance or financial professionals’ fiduciary responsibility ?
    • There are statutory obligations that state legislatures have imposed on insurance providers and their licensed producers to uphold their fiduciary duties and disclose material information to consumers.
      • provide customer-focused sales and service, disclosing all options that may be available to your client.
      • If you are a securities registered representative, to be compliant with NASD Conduct Rule 2310, you must also disclose the availability of the life settlement option versus letting a customer surrender or let lapse a policy, or retain a policy rather than investigate and accept a life settlement, should they qualify.
      • It is incumbent upon you to be indifferent as to a client’s choice of proprietary or non-proprietary products or services. A life settlement is not a product; rather, it is a hybrid financial tool.
      • “ When applicable, a life settlement’s LSV can be three to four times the policy’s cash surrender value. The liquid capital availability differential between the LSV and the CSV can be a five-, six- or, possibly seven-figure “off balance sheet asset” that can recast an individual’s net worth and create significant additional monies to fund more cost-effective life insurance coverage, or other financial instruments or investments that can maximize a prospective client’s asset position.”
    • Lawrence B. Patterson, Insurance News Net March 2006
    Fiduciary responsibility
  • 13.
    • Life settlement
      • A Life Settlement is the purchase of an insurance policy insuring the life of a senior (age 65+),
      • for a lump sum amount in excess of the policy’s cash surrender value, but less than the death benefit. The buyer assumes the premium payments, and receives the death benefit.
    • Viator
      • A Viator is a policy owner that has assigned ownership of a life insurance policy for cash compensation, which is less than the death benefit.
    • Life settlement Broker
      • The LS Broker represents the Viator in the negotiation and sale
      • of his or her life insurance policy with a single or
      • multiple Life Settlement Providers/Funders.
      • The broker is a representative of the policy owner
      • and not the Provider/Funder.
    • Life settlement Providers or Funders
      • A Provider or Funder is any entity engaged in the business of effecting a transaction in a life settlement for the purposes of investment.
      • Providers or Funders are the purchasing parties of a life insurance policy and assume
      • it’s premium obligations once acquired.
      • Providers or Funders do not represent the policy owner and are not subject to the same
      • guidelines as a Broker.
    Definitions and distinctions
  • 14.
    • The settlement amount is based mainly on the Net Present Value (NPV) of policy’s future
    • payout, less loans and future premiums.
    • The matrix behind this valuation which determines its attractiveness and subsequent interest from providers includes the following:
    • Quality of insurance carrier
    • Death Benefit
    • Age and life expectancy of insured
    • Annual premiums in relation to Death Benefit
    • While the death benefit remains a constant (unless there are loans against the policy), the cost of sustaining the policy until the death benefit is realized plays the largest role in valuation of a policy. It is simply a matter of revenue over investment.
    • In measuring the ROI the Provider/Funder needs to determine the cost of sustaining the policy based on,
      • How much the premiums are in relation to the overall Death Benefit
      • How long the premium will need to be paid
    • A Life Settlement is the purchase of an insurance policy insuring the life of a senior (age 65+), for a lump sum amount in excess of the policy’s cash surrender value, but less than the death benefit. The buyer assumes the premium payments, and receives the death benefit.
    • Viator
      • A Viator is a policy owner that has assigned ownership of a life insurance policy for sash compensation, which is less than the death benefit.
    • Life Settlement Broker
      • The LS Broker represents the Viator in the negotiation and sale
      • of his or her life insurance policy with a single or
      • multiple Life Settlement Providers/Funders.
      • The broker is a representative of the policy holder
      • and not the Provider/Funder.
    • Life Settlement Providers or Funders
      • A Provider or Funder is any entity engaged in the business of effecting a transaction in a Life Settlement to which the Viator is not a party.
      • Providers or Funders are the purchasing parties of life insurance policies in a Life Settlement.
      • Providers or Funders do not represent the policy holder and are not subject to the same guidelines as the Broker.
    Valuation of a policy for settlement
  • 15.
    • In 2001, and since with various amendments and modifications, the NAIC Viatical Settlements model Act has provided a set of guidelines and standards for the Life Settlement industry which address issues such as:
    • Licensing
    • Standardized forms and applications
    • Outlines of disclosures to sellers and investors
    • Duties of Brokers and Provider/Funders
    • Rights of the Seller
    • Advertising
    • Ethical standards and practices
    • State by State
    • On a state level there may be the following:
      • States with Life Settlements Law
      • States with Viatical Settlements Law
      • States without Life or Viatical Settlement Law
      • Legislation is currently being proposed
      • Check with state insurance regulators for more information regarding your own state.
      • Requirements change from time to time.
    Licensing and regulation
  • 16.
    • Our experience has found that for a policy to be considered investment worthy certain criteria must be met which give a policy a profile attractive for investment. These are the criteria that are generally required for the successful settlement of an unneeded policy.
    • Male: 65 year-old and up
    • Female: 70 year-old and up
    • Death Benefit: $100K and up
    • Policy types: Convertible term, UL, Whole Life, and Survivorship
    • In force for at least 24 months
    • Annual premiums: 10% or less of death benefit
    • Cash Surrender Value: 40% or less of death benefit
    • As we illustrated earlier in “Valuation of a Policy for Settlement”,
    • there are several factors that are taken into account during the
    • valuation process. A qualifying policy is based on a combination of the above data, each in varying degrees.
    Candidates for a Life Settlement
  • 17.
    • How does the settlement process begin? Once there is an interest on the part of the insured to explore the settlement option, what happens?
    • Evaluation
      • An illustration of the policy is sent for initial review.
      • Feedback given to insured and their financial representative.
    • Application
      • The policy owner and information on the insured
      • HIPAA release and disclosure form signed by the insured
      • Contact information on medical care providers
      • Authorization to Release policy information
    • Processing
      • Medical documentation ordered
      • Life Expectancy report ordered
    • Submission
      • All documents verified
      • Documents are packaged for pricing with institutional funders
    Getting started
  • 18. ** Time lines for third parties within the process such as physicians and the issuing insurance carrier may vary. The Settlement Process 2. Illustration of policy is submitted for evaluation and feedback relayed to policy owner 3. Application submitted with HIPAA and release of information documents 4. Medical documents and life expectancy report ordered 5. All documents verified and policy is packaged for pricing 6. Bids received from Funders 7. Negotiation with highest bidders for final settlement offer 8. Offer accepted by policy owner, Legal documents signed policy owner and insured 1 2 3 4 5 6 7 8 1. Policy owner has interest to explore Settlement opportunity 9. Legal documents sent back to Funder and reviewed 9 TimeLine 2-3 days 3-4 days 2-4 weeks 3-7 days 1-3 weeks See 6 7-10 days 3-5 days 10. Settlement amount is transferred into escrow for the seller and transfer of ownership and change of beneficiary documents are executed by Funder,.
  • 19.
    • May states have a rescission period in which the policy owner may change their mind and cancel the sale of their policy.
    • The rescission period stipulates that the owner may rescind the Life Settlement contract at any time, within the allotted time stipulated by the rescission period. Regulations regarding periods of rescission may differ from state to state).
    • When the agreement to sell the policy is rescinded by the policy owner, the contract is rendered null and void.
    • The death of the Insured during the rescission period will also void the settlement transaction, and the original beneficiaries will be the recipients of the death benefit.
    Rescission period
  • 20.
    • Although tax laws and regulations vary from state to state the following is a broad overview of the tax implications to the policy holder in the case of a life settlement.
    • Policy 10 years old
    • Face Value $1,500,000
    • Cash Surrender Value $100,000
      • Basis $70,000
      • Earnings $30,000
    • Settlement amount $310,000
    • Proceeds up to the amount of premiums previously paid to date (Basis) on a policy are
    • exempt from taxes.
    • The amount above premiums paid up to the total CSV is taxed as ordinary income.
    • Everything received in a settlement above the CSV amount is taxed as capital gains.
    Tax implications $210,000 Taxed as Long Term Capital Gains $30,000 Taxed as regular income $70,000 Non-Taxable
  • 21. Thank You