What is a Life Settlement?

 

A Life Settlement is the sale of an existing life insurance policy to an institutional buyer for more than its cash surrender value but less than its death benefit. This transaction typically involves an insured who is over the age of 70 and not terminally or chronically ill. Sophisticated investors such as investment banks, hedge funds, mutual funds, pension funds and others actively seek to purchase policies in what is commonly referred to as the secondary market for life insurance. It is worth noting that when an insured with a terminal illness sells a policy, the transaction may be referred to as a Viatical Settlement and involve different buyers. 

 

How this work?

 

The policy owner sell the policy to buyer, the buyer keep paying premium to insurance company, the insurance company pay death benefit to buyer when the policy inured die. 

When can I consider selling policy?

 

Retirement, divorce, death of spouse, sale of business, bankruptcy, estate valuation, un affordable premium,liquidity needs.

 

What can I do with the money from selling the policy?

 

Income supplement 

Buy other type insurance(health, LTC, disability...) 

Investment 

Gifts to someone or families 

Donation ....................

 

What are the tax issue of selling policy? 

• Tax-Free. Generally, the portion of the sale proceeds up to the total premiums paid by the policy owner into the contract less cost of insurance (or the policy’s adjusted cost basis) will be received free of federal income tax. 

• Ordinary Income. The portion exceeding the adjusted cost basis, but not exceeding the cash surrender value, will be taxed as ordinary income.

• Capital Gain. The portion exceeding the cash surrender value will be a gain which, in most circumstances, will be considered a long-term capital gain.

 

How policy qualify?

Insured Health

Age: 70-95 (75+ ideal)

Life Expectation: 180 months or less

Health: Health of the insured is worse than the issue class

Policy

Policy Type: UL, SUL, VUL, SVUL, Convertible Term & WL

Carrier Rating: A- or better by AM Best

Death Benefit: $50,000 - $50,000,000 ($1m - $5m ideal)

Premium: Minimum level annual <10%

Maturity: Age 100 or greater

Contest ability : Past the state required minimum period, usually 2 years