Life Settlements: An Insurance Planning Tool
By Valerie Greenberg
Life 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.
The Exhibit 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.
A life 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 the policy.
When 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.
For 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.
In 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.
A policy 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.
When 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.
Different 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.
There 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).
Ideal 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.
As 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.
What is a Life Settlement? 
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