Life settlement power point


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Life settlement power point

  1. 1. Life Settlements For Training Purposes Only
  2. 2. What is a Life Settlement? <ul><li>A Life Settlement is simply the sale of an existing life insurance policy that is no longer affordable, wanted or needed. </li></ul><ul><li>The seller sells their ownership and beneficiary rights to the policy for a cash payment. </li></ul><ul><li>The investor buys the policy at a discount and holds it until maturity and receives the full face value. Therefore, one is always buying low and selling high. </li></ul>
  3. 3. How long have Life Settlements been around? <ul><li>In 1911 the Supreme Court ruled in Grigsby Vs Russell that insurance policies are legally viewed as financial assets which may be sold to a third party, just as any other tangible investment can be sold at the owner's discretion. </li></ul><ul><li>Institutional Life Settlements – since 1911 </li></ul><ul><li>Retail Life Settlements - since 1997 </li></ul>
  4. 4. Are Life Settlements Safe? <ul><li>A general reserve life insurance company typically has about $1.04 in reserve for every dollar issued in life insurance. In addition, insurance companies are required in each state to contribute to a reserve state fund. There has never been a failure to pay a legitimate policy of a general reserve life insurance company in American history….. NEVER ! </li></ul>
  5. 5. Life Settlements <ul><li>People buy life insurance for a variety of reasons. </li></ul><ul><li>Life insurance is simply a financial tool. Most of us buy life insurance to protect our families in case of our early demise and the future loss of income. </li></ul><ul><li>We all need this type of life insurance to protect our families. </li></ul>
  6. 6. Life Settlements <ul><li>People also buy life insurance for other reasons. </li></ul><ul><li>Life insurance is often purchased on the life of a business owner to protect the bank or others from loss in case of the death of that person. This is called Key-Person Insurance . </li></ul><ul><li>Key-Person insurance is taken out to protect a particular person or business, for a particular period of time. </li></ul>
  7. 7. Life Settlements <ul><li>People also buy life insurance to cover their estate during a period of illiquidity. </li></ul><ul><li>If a wealthy individual were to die early and leave an estate with large estate taxes due, their heirs might have to sell family assets to pay those estate taxes. </li></ul><ul><li>These people buy large insurance policies to pay these taxes in the event of their early demise. This is not insurance to protect their family from loss of income, but protection from estate taxes. </li></ul>
  8. 8. Life Settlements <ul><li>Business policies and estate planning policies are part of what we call special use policies. </li></ul><ul><li>96% of these special use policies lapse within 8 years, and no death benefit is ever paid by the insurance company. This creates trillions of dollars of free cash flow for insurance companies. </li></ul>
  9. 9. The New York Times: <ul><li>“ Last year, for instance, insurance companies reduced their financial exposure by $1.1 trillion when 19.8 million policyholders stopped paying premiums, according to the Insurance Information Institute. In comparison, the industry paid death benefits on only 2.2 million policies.” </li></ul><ul><li>Charles Duhigg, “Late in Life, Finding a Bonanza in Life Insurance” </li></ul><ul><li>December 17, 2006 </li></ul>
  10. 10. Life Settlements <ul><li>Consider what happens when business owners and wealthy individuals don’t need or want their insurance policies anymore? </li></ul><ul><li>What if they sell their businesses or their estates become liquid, or they determine that they can no longer afford the premiums? </li></ul><ul><li>What are their options? </li></ul>
  11. 11. Life Settlements <ul><li>Most insurance companies would tell these policyholders that they have 3 options: </li></ul><ul><ul><li>They can take the cash value and cancel their policy. </li></ul></ul><ul><ul><li>They can take a “paid-up” policy for a much lesser amount. </li></ul></ul><ul><ul><li>Or, they can let the cash value pay the premiums for a period of time and then let the policy lapse. </li></ul></ul>
  12. 12. Life Settlements <ul><li>These 3 options are very good for the insurance company. </li></ul><ul><li>Why? </li></ul><ul><li>Because they save the insurance company billions of dollars each year, by ensuring that they don’t ever have to pay the death benefit. </li></ul>
  13. 13. Life Settlements <ul><li>But…what they don’t tell the policyholders is that they have a fourth option: they could sell their insurance policy to an investor for its fair market value . </li></ul><ul><li>The fair market value is whatever someone is willing to pay for the policy on the secondary market. On average a Life Settlement will pay the insured 3 to 4 times the cash value of the policy. </li></ul><ul><li>This is called a Life Settlement! It is turning a death benefit into a living benefit ! </li></ul>
  14. 14. Why have you not heard about Life Settlement Investments? <ul><li>Life Settlements are still uncommon knowledge to most people. Even the majority of those in the financial services industry are still ignorant of this asset. </li></ul><ul><li>Insurance companies don’t want you to know about Life Settlements. It costs them billions of dollars each year. </li></ul>
  15. 15. Why have you not heard about Life Settlement Investments? <ul><li>However, many insurance companies are buying large blocks of Life Settlement policies issued from other companies as hedge funds . They invest in Life Settlements, but they do not want you to. </li></ul>
  16. 16. Why have you not heard about Life Settlement Investments? <ul><li>This is not a security, so your stock broker most likely does not sell it, and most of the private money invested in Life Settlements comes from an investor’s poorly performing stock and bond portfolios. If a broker cannot sell it, he probably will not recommend it. </li></ul>
  17. 17. Why have you not heard about Life Settlement Investments? <ul><li>Institutions would rather buy these high-yield assets, re-package them and sell them to you in the form of a private investment vehicle like CDs, annuities, bonds, etc. </li></ul><ul><li>If you’ll notice, banks, insurance companies and financial institutions don’t buy CDs and annuities – they sell them. </li></ul><ul><li>Warren Buffet is investing billions of dollars in Life Settlements. </li></ul>
  18. 18. Life Settlements are now considered a valuable financial planning tool <ul><li>Recognized by: </li></ul><ul><li>USA Today Wharton School of Business </li></ul><ul><li>Wall Street Journal AARP </li></ul><ul><li>Kiplinger’s American Cancer Society </li></ul><ul><li>Bloomberg Time Magazine </li></ul><ul><li>MSNBC Business Week </li></ul><ul><li>Dateline The Economist </li></ul><ul><li>60 Minutes Motley Fool </li></ul><ul><li>American Institute of CPAs </li></ul>
  19. 19. Life Settlements A Multi-Billion $$$ Industry Major financial publications continue to attest to the growth of the industry.
  20. 20. “ We expect the Life Settlement business, an emerging secondary market for life insurance, will grow more than ten-fold to $160 Billion over the next several years.” Sanford C. Bernstein, Research Call
  21. 21. <ul><ul><li>Their pursuit of this market is related to the degree of protection and the avoidance of market and economic risk. </li></ul></ul><ul><ul><li>The Return of their Principal and Return on their Principal are contractual obligations of highly rated insurance companies and are not subject to any market or economic considerations. </li></ul></ul>Big Industry, Big Investors Why? Wall Street Says…
  22. 22. Safety and Security -Contractual Agreements with A rated or better Legal Reserve Life Insurance Companies -Uncorrelated to stock market, oil prices, interest rates or even terrorism Mainstream -Institutional Due Diligence -Opportunity to invest on level playing field with institutions No Management Fees -All fees are included in acquisition cost -Qualified funds (IRAs) have a custodial fee Liquidity -Medium to long term investment -A sit and hold type investment Performance -Absolute Payout -Historical double-digit returns Clear Exit Strategy -Forces you out on top – you always buy low and sell high! -Vast majority of all investors reinvest Win/Win Investment -Insured receives > cash value -Investor receives > solid returns What makes LS an ideal investment for many?
  23. 23. Absolute Returns <ul><li>Bloomberg says Life Settlements are the only asset which can truly be said to provide absolute returns . They are not correlated to any traded market – whether stock, bond, currency or commodity markets – nor to political or economic upheaval. Once invested the only variable affecting a Fund’s return is the life expectancy of the policies held. </li></ul>
  24. 24. Investing with Life Settlements <ul><li>Now the average accredited investor can invest in the Life Settlement market that has typically only been available to institutional investors like banks, hedge funds and Warren Buffett, because of fractionalizing . </li></ul>
  25. 25. What is fractionalizing policies? <ul><li>Fractionalizing is the practice of selling small fractions or percentages of a large policy. Many of the special use policies on the market are $5 Million face amount and higher. Until now, the average individual investor could not participate in buying policies of that size. </li></ul><ul><li>Now they can because they can buy a small fraction or percentage of the policy. </li></ul>
  26. 26. How the process works… <ul><li>Each transaction should ALWAYS be processed through a Trust Company. </li></ul><ul><li>The Trust Company acts similar to a Title Company in a real estate transaction. They make sure everything is processed properly. They also manage IRA accounts, send out quarterly reports to clients and annual reports to the IRS. </li></ul>
  27. 27. Life Settlements <ul><li>Nothing is perfect, and Life Settlements are no exception. </li></ul><ul><li>1. It is not a liquid investment. </li></ul><ul><li>You should not put any money in Life Settlements that you might need before the policy matures. </li></ul><ul><li>2. There is the possibility of a premium call. </li></ul>
  28. 28. Life Settlement <ul><li>One can purchase fractions of multiple Life Settlement policies to reduce the risk of a premium call. We know that some will mature early and some will mature on time, and some will go past LE. The early maturities will pay a premium rebate which can be held to cover any possible premium calls for policies that might mature late. </li></ul>
  29. 29. Example Portfolio… <ul><li>S. Moldow John Hancock Life </li></ul><ul><li>LE: 2-4 years Date: 12/21/2006 </li></ul><ul><li>Face: $ 5,000,000.00 </li></ul><ul><li>Acquisition Cost: $ 3,100.000.00 </li></ul><ul><li>Placed: $ 13,000.00 .42% Owned </li></ul><ul><li>Projected Return: $ 20,967.75 </li></ul><ul><li>This policy matured in only 18 months for this owner! </li></ul><ul><li>The client received a check for $20,000.00. She left $967.75 in her money market account for liquidity. She also left her premium rebate of $2,505.67 in her money market account. Her return on this policy was about 60% annualized. </li></ul>
  30. 31. What is Life Expectancy (LE)? <ul><li>Life Expectancy (LE) is the key factor in determining the value of a policy. The shorter the LE, the more value the policy has. </li></ul><ul><li>There are 5 or 6 companies who are experts at determining life expectancy (LE) which are utilized in the purchase of these policies. They have a high degree of accuracy in predicting life expectancy. </li></ul>
  31. 32. Rule of 72 <ul><li>Investment Initial Historical Rate # of years Amount after </li></ul><ul><li>Vehicle Investment of Return to Double 30 Years____ </li></ul><ul><li>Bank CD $100K 4% 24 $266,666 </li></ul><ul><li>Mutual Fund $100K 6% 12 $450,000 </li></ul><ul><li>Indexed Annuities $100K 9% 8 $950,000 </li></ul><ul><li>Life Settlement $100K 12% 6 $3,200,000 </li></ul><ul><li>If you earned $100K per year, it would take you 30 years to earn $3,000,000.00 </li></ul>
  32. 33. Let’s analyze a Life Settlement policy… <ul><li>Policy Information Investment Information </li></ul><ul><li>Face Amount: $2,000,000.00 Amount to be invested: $10,000.00 </li></ul><ul><li>Acquisition Cost: $1,000,000.00 Percent of Ownership in this Policy: 1.0% </li></ul><ul><li>Policy Issue Date: 7/19/2003 Payout at Maturity: $20,000.00 </li></ul><ul><li>Number of Escrow Years: 5 Investment Multiplier: 2.0 </li></ul><ul><li>Amount Being Escrowed: $222,500.00 Predetermined Gross Profit: $10,000.00 </li></ul><ul><li>Life Expectancy: 3 to 5 years Gross Yield at Year 5 Maturity: 100% </li></ul><ul><li>Annual Premiums: $44,500.00 Annualized ROI at Year 5 Maturity: 20% </li></ul><ul><li>If Policy Approximate Premium Call Gross Payout Net Payout Annualized </li></ul><ul><li>Matures in: Premium Return Due That Year Yield_____ </li></ul><ul><li>Year 1 $1,711.54 $0.00 $20,000.00 $21,711.54 117% </li></ul><ul><li>Year 2 $1,283.65 $0.00 $20,000.00 $21,283.65 56% </li></ul><ul><li>Year 3 $ 855.77 $0.00 $20,000.00 $20,855.77 36% </li></ul><ul><li>Year 4 $ 427.88 $0.00 $20,000.00 $20,427.88 26% </li></ul><ul><li>Year 5 $ 0.00 $0.00 $20,000.00 $20,000.00 20% </li></ul><ul><li>Year 6 $ 0.00 $427.88 $20,000.00 $19,572.12 16% </li></ul><ul><li>Year 7 $ 0.00 $427.88 $20,000.00 $19,144.24 13% </li></ul><ul><li>Year 8 $ 0.00 $427.88 $20,000.00 $18,716.36 11% </li></ul><ul><li>Year 9 $ 0.00 $427.88 $20,000.00 $18,288.48 9.2% </li></ul><ul><li>Year 10 $ 0.00 $427.88 $20,000.00 $17,860.60 7.8% </li></ul>
  33. 34. Life Settlements <ul><li>You can do </li></ul><ul><ul><li>Cash investments </li></ul></ul><ul><ul><li>401K rollovers </li></ul></ul><ul><ul><li>Traditional IRAs </li></ul></ul><ul><ul><li>Roth IRAs </li></ul></ul><ul><ul><li>96% of Life Settlement investors re-invest in Life Settlements when their policy matures. </li></ul></ul>