Examples of Important Life Settlements Topics Covered by CPE NASBA Approved Seminar Presented by Integrity Life Solutions, LLC – “Life Settlements: Introduction and Best Practices”
Definition: Life Liquidation: The purchase of a life insurance policy by an investor (in the secondary life insurance market) where the insured of the policy is elderly (elderly or has a relatively short life expectancy). low) for an amount greater than the cash surrender value of that policy.
The growth of the life settlements market (also known as senior settlements), sometimes confused with viatical settlements per se, is due to some extent to the large number of policies that are subject to purchase and investment. But in the life settlement business, some policies are simply better for the investment than others. In “Life Settlements: Introduction and Best Practices,” a free CPE course offered by Integrity Life Solutions, LLC, Maplewood, NJ, this topic is covered in great detail. A summary is provided in this document.
Free CPE Course: What is being said about UL policies:
The CE course on Life Settlements describes different types of policies that are subject to this secondary market in life insurance. Universal Life policies and certain term policies are the most desirable for investors in the secondary market. Why is this? Let’s take a look first at Universal Life (UL) policies. UL policies were developed from the marketing perspective of providing policyholders with greater flexibility in paying premiums compared to traditional whole life policies. While whole life policies, probably the most popular form of permanent policy before the advent of UL policies, generally required by their terms periodic premium payments of equal amounts (the level premium), UL policies only suggest a target premium. to be paid as per a plan that is developed between the carrier, agent and policyholder. However, UL policies do not lapse even though such target premium has not been paid, as long as the account value within the policy combined with any additional premium is sufficient to cover the cost of insurance on the policy for that year, in addition to any other expenses, costs or fees, such as sales expenses, that the carrier is authorized to collect. Investors in the secondary life settlement market will always prefer the flexibility offered by the UL policy over the rigidity required by a whole life policy, for example. The CPE for Accountants course clarifies how investors in the senior closeout market prefer to make minimal and frequent periodic premium payments to maximize the utilization of funds and cash flow of their fund or portfolio. In other words, investors or funders in this life liquidation space would prefer to use any excess funds to purchase additional assets or pay off additional policies and not overfund a policy by putting excess cash in the hands of the insurer. Whole life policies do not offer this flexibility to such investors in the life settlement market.
The CPE course also covers the following concept. Due to the forced “overfunding” of policies, i.e., the accumulation that occurs in the cash account, by whole life policies, you are much more likely to see higher cash surrender values in policies whole life than in UL policies. Because a life settlement, or even a viatical settlement, occurs only when an investor is willing to pay more than the cash surrender value, it is naturally more difficult to achieve when the cash surrender value is relatively higher. . Here again, whole life policies are less desirable from an investor’s point of view.
Free CPE course: what is being said about term policies:
Intuition may dictate that term policies cannot be sold or traded at all in the life settlement or senior settlement market. Term policies, by definition and by name, are only for a specific term, say ten years, or twenty years, even thirty years in some cases. If, by their nature, policies are likely to lapse before an insured’s projected useful life, why would an investor be interested in buying such a policy in the life settlement market to hold it until “maturity”? Is there a book value for such assets if they are purchased in these circumstances? CPAs and other professionals should understand that many term policies have what is known in the insurance industry as a “conversion feature” that allows the term policy to be converted to a permanent policy of equivalent face value, usually in the form of a UL policy. Such conversion features normally expire at a precise age, on the insured’s date of birth, for example, at age 72 or 75.
Accountants and other professionals who have clients who nonetheless hold such term policies should be aware of this and advise their clients that if such a conversion feature is included in the policy contract then they have the option of making make the policy permanent and maintain it. valid until the death of the insured. Generally such conversions will result in much higher premiums, due to the advanced age of the insured; however, the resulting premiums will be linked to the insured’s rating at the time of issuance of the policy. For clarity, this means that if 20 years ago when the insured was 54 years old, they were rated “preferred” – very healthy – then by converting today, at age 74, their “preferred” rating will be imputed. . , even though his health may have deteriorated relatively, that is, he is not healthy even for 74 years. Regardless of the constancy of the rating, the premiums for a permanent policy are likely to increase significantly due to the permanent nature of the policy and the advanced age of the insured.
However, term policies are excellent candidates for secondary life settlement because:
1. They have absolutely no cash surrender value (prior to conversion) that must be exceeded by any viable offer made by a life settlement provider or investor.
2. The current policy owner’s expectations may be relatively low in that, as a term policy owner, you never intended to hold the policy beyond its initial term and may not even have knowledge of the existence of the conversion function. Simply put, the current policy owner may be happy to get something instead of nothing if he simply lapses the policy (letting it go, so to speak) by not converting it.
Finally, as a footnote to this section, the CPE course will point out that providers or buyers can purchase a term policy prior to conversion by the current owner and convert the policy themselves, or request conversion first by the current owner. current owner, and payment of any conversion premium, which may or may not be repaid by the new owner/investor.
Free CPE course – what is said about other types of policies:
Other policies, such as variable universal life policies, indexed universal life policies, and survivor policies are all variations on a theme. Detailed descriptions of these types of policies are beyond the scope of the free CPE webinar for accountants, CPAs, and other professionals. Suffice it to say, however, that they are also generally outside the scope of the parameters employed by providers and funders in the life settlement market to the extent that:
1. They pose difficulty in evaluating the valuation
2. They pose difficulties in correlating the illustrations of the carriers with the valuation models
3. There are other, simpler forms of policy type in a weak market to buy with all other parameters being theoretically equivalent.
4. In the nature of a self-fulfilling prophecy, because they are less desirable to the market, providers/financiers are less likely to buy them with a view to reselling assets from their portfolio in the future, for liquidity, or for profit. purposes
The reader is encouraged to attend Integrity Life Solutions, LLC’s free CPE seminars to learn more about this and other topics in the life settlement arena. Contact Susan Lubin, CFP at 973.275.1110