Life Settlements

An Overview

< Back

"A Sensible Approach to Wealth Management"

Prior to the emergence of the life settlement industry in 1998, life insurance companies were the only option for seniors seeking liquidity and an exit strategy from unwanted policies. But now, the secondary market for life insurance has created an opportunity for policyholders to have their policies appraised for their fair market value. Seniors now have a choice to obtain a cash amount from an otherwise "dormant asset" that on average equals approximately three times the cash surrender value.

Why would a senior sell a life insurance policy?

But why would a senior want to sell a life insurance policy? Because circumstances change and the original need for the insurance may no longer exist. In such cases, it makes sense to consider a life settlement. Here's why.

During the economic growth in the late 1990's, many seniors saw their net worth increase substantially. In order to provide sufficient cash to their heirs to pay estate taxes, many seniors purchased life insurance in amounts sufficient to cover the tax liability. However, because of the economic downturn in 2000 - 2002 where many individuals saw their net worth shrink, and because of the expansion of the estate tax exemptions in 2001, many of these seniors no longer have large estate tax liabilities. As a result, some seniors are left with an "imbalance" in terms of the amount of life insurance they are carrying as compared with the value of their estate. In such cases, annual premiums are presenting a substantial burden.

Exit options available to seniors include:

1. Let the policy lapse - leaving behind a substantial investment in premium payments;
2. Surrender the policy and accept the cash surrender value;
3. Sell the policy to an institutional investor for its true economic value

It is important to note that holders of life insurance policies who sold their policies in 2002 received $242 million in excess value that would have been forfeited to insurance companies, according to a study conducted in 2002 by the Wharton School of Business at the University of Pennsylvania entitled "The Benefits of a Secondary Market for Life Insurance Policies."

The Sleeping Giant

Early adopters of the secondary market for life insurance policies - both policy owners and life settlement companies - are particularly aware of the financial empowerment that can result from a life settlement and of the strong growth expected in this emerging industry. Categorized by some as "a sleeping giant", the secondary market for life insurance policies has grown from an estimated $50 million in 1990 to estimates that exceed $134 billion today, as stated in On Wall Street, Nov. 2002.

Today, the emerging life settlement industry has caught the attention of Wall Street and international investors. As reported by A.M. Best in an Oct. 2003 issue of BestWeek, one life settlement company recently began trading on NASDAQ. The Economist, a British publication, reported in May 2003 that after savings accounts and government bonds, life insurance may be the most respectable of investments due to the new secondary market for life insurance policies. And according to Singapore's The Business Times, Nov. 8, 2003, last year an estimated US$1 billion was committed to the life settlements market by institutions including General Re, Merrill Lynch, Zurich Financial Services group and Dresdner Bank.

It Just Makes Sense

"At Advanced Settlements, we are finding that in more than 50 percent of the time, the policy holders use the proceeds from life settlements to purchase new life insurance products," said Sean McNealy, managing partner of Advanced Settlements. "That's why life settlements make so much sense."

McNealy spoke of a specific case which a producer brought to Advanced Settlements. It involved a 78 year old male who held three universal life policies totaling $1.2 million with annual premium payments of $34,960. The client wanted to reduce his annual premiums but maintain similar coverage. The cash surrender value of the three policies was $289,936. Through its network of institutional funders, Advanced Settlements was able to receive multiple offers, the highest of which was $408,000. The client used the $408,000 to purchase a new $1 million universal life policy with zero premiums.

"It doesn't get any better than that in terms of wealth management," added McNealy.

According to Tom Offutt, Advanced Settlements' compliance officer, "Life settlements are becoming the new frontier for financial professionals representing a challenging new marketplace in today's fact paced financial services industry." (See "Life Settlement Licensing Today for CPA's," by Thomas F. Offutt, J.D.)

About Advanced Settlements

Founded in 2000, Advanced Settlements, LLC is a leader in the Life Settlement marketplace and specializes in cases of $250,000 or more. The company is committed to providing liquidity to senior policyholders by leveraging the value of their life insurance policies for estate planning purposes. Having overseen more than $840 million in Life Settlement transactions since 2001, the company maintains relationships with a network of funding institutions and presents multiple offers for each transaction. The company offers a variety of services to financial professionals, including free E&O coverage as well as compliance and marketing assistance.