By Trevor Thomas

 

I will send you his article as soon as I can. I will send you his article as soon as I can. I will send you his article as soon as I can. I will send you his article as soon as I can. I will send you his article as soon as I can. I will send you his article as soon as I can. I will send you his article as soon as I can. I will send you his article as soon as I can.

 

The question was: Life insurance policyowners need to be hearing the message that they can sell their existing life policies if:

The answer is: e) all of the above. It is widely known that sales are possible when policyholders are in very poor health. But, in a statement issued last fall on the impact of the economic slump on the settlement market, Doug Head pointed out that regulators should be letting the consumers know that they can sell their life policies even if the policyholders are relatively healthy. Head is executive director of the Life Insurance Settlement Association, Orlando, Fla. See his comments

The question was:  Can a life insurance settlement qualify for Section 1035 exchange treatment?

 

The answer is:  Marketing organizations have suggested that the purchase of a new policy with life settlement proceeds can qualify for Section 1035 exchange treatment. A sale-purchase departs significantly form the standard industry practice used to effectuate Section 1035 exchanges.

 

Under the classic “direct exchange” approach, the policyowner assigns the policy to the new carrier, the new carrier surrenders the policy with the replaced carrier, and the new carrier than applies the surrender values from the old contract to the new policy. Under the direct exchange method, the policy owner is never in receipt of the surrender proceeds, a fact that has figured prominently in the Internal Revenue Services’ favorable private rulings involving Section 1035.

 

In Greene v. Comm. [(85 TC 1024 (1985), acq., 1986-2 CB 1)], a decision involving annuity contracts, the Tax Court held that a transaction qualified for Section 1035 treatment where a policyowner took receipt of an annuity’s surrender proceeds and used them to purchase a comparable annuity with a new carrier. Although a policyowner could argue that an escrow agent was in receipt of the settlement proceeds that were then applied to the new policy, it remains to be seen whether the Service would rule that this transaction qualifies for Section 1035 treatment.

 

In a Section 1035 exchange, the replaced carrier typically issues a Form 1099R and enters Code 6 in Box 7 to identify the transaction as a tax free exchange of life insurance. It is not clear how an escrow agent that uses settlement proceeds to purchase a new contract would report the transaction for 1099R purposes.

 

Source: This is an excerpt from Life Settlement Planning, a 2008 book in the Tools & Techniques serries published by The National Underwriter Company, Cincinnati, Ohio, which also publishes Settlement Watch.  The book is co-authored by: Stephan R. Leimberg, Caleb J. Callahan, Bryan T. Casey, James Magner, Barry Reed, Lawrence J. Rybka, Paul A. Siegert.  Read more about this book

The question was: The Financial Industry Regulatory Authority, or FINRA, has asserted regulatory jurisdiction over settlements involving which type of policy?

The answer is: a.  Sharon Zackula, FINRA associate vice president and associate general counsel, referenced that fact while addressing the fall 2008 conference of the Life Settlement Association, Orlando, Fla. Her remarks focused on how FINRA views compensation for such transactions. Read about it here

 

According to FINRA Notice to Members 06-38, issued back in August 2006, life settlements involving variable insurance policies are securities transactions, and firms and associated persons involved in such transactions are subject to applicable NASD (fINRA) rules. See the notice here

The question was: I’ve heard that, due to today’s economic strains, some settlement cases may be rejected that previously would have been accepted. Do you recommend that I submit possibly marginal cases anyhow, or should I hold them back?

 

The answer is: It's always a great idea to submit a case for an offer, marginal or not, regardless of today's (or tomorrow's) economic uncertainty. As they say, one man's trash is another man's treasure.

 

Each provider (or buyer) in the secondary marketplace looks at each and every case differently. Some may be interested in a case that is exactly like the potential case that the insured or their representative may be considering shopping. However, if they believe all the "industry noise," they may be reluctant to submit their case because they were led to believe there wasn't a market.

 

While I can't speak for the rest of the marketplace as a whole, I can say that we are a busy now as we have ever been. There is a greater urgency now with respect to the offers that are given to us and subsequently, presented to our relationships with respect to turnaround times.

 

Maybe people (agents, advisors, and clients alike) are finally realizing it's better to take the proverbial "bird in the hand" rather than to hold out for the "two in the bush"—because a lot of times, that bush with those two birds is never found and that bird that we had in our hand has flown away. It's always better to be safe than to be sorry.

 

Rob Haynie
Managing Director
Life Insurance Settlements, Inc.
Fort Lauderdale, Florida
rob@lisettlements.com
www.lisettlements.com

By Matt Brady

 

As if facing a worldwide economic crisis weren’t enough, life settlement investors have found out in recent months that insureds are going to live longer than was previously thought.

 

At least 2 major medical underwriters, the companies who evaluate insureds current medical status and project how long they’ll live, have announced changes to their projections in recent months. The changes lengthen their life expectancy estimates.

 

While insureds may welcome this new, if only statistical, lease on life, for life settlement investors, it means that they’ll pay more premiums and see less profit from the transactions.
 
Minneapolis-based 21st Services has announced changes to its projections that could be more than 20% longer in some cases. Kennesaw, Ga.- based AVS Underwriting, LLC, followed with an announcement of a roughly 10% adjustment.

 

Part of the changes stem from the fact that “the life settlement business is still very young in terms of data that is available,” according to 21st Century’s Chief Actuary Vincent Granieri.

 

As an industry, medical underwriters have probably evaluated less than half a million lives since they began providing life expectancy reports, Granieri estimates. “The good news,” he says, “is that all of them are life settlement lives” and are therefore relevant in terms of data. “The bad news is that it’s not enough to be credible” in terms of basing a model solely on those lives.

 

In general, he says, actuaries “are used to having millions” of data points to work with. “Over time that data will emerge,” he says, although he estimates that it may take a decade for the data to reach 1 million lives, “let alone 2 or 3 million.”

 

Compounding the problem, he says, is the nature of much of the data that is out there. This data comes from life insurance carriers, he points out, and while there are ample individuals to use for basing expectancy evaluations, he says the data tables were created for individuals seeking to obtain life insurance rather than those looking to sell an existing policy.

 

Effectively, Granieri says, as life insurance actuaries are building their data tables, they are going to factor in a higher mortality to rate as a conservative stance.

 

By comparison, for life settlement companies, a conservative stance would be the opposite—a low mortality rate that assumes individuals will live longer. “Conservative for them (life carrier actuaries) is quite aggressive for us,” he says.

 

As a result, he says, 21st Services has worked to combine the data of the 2008 Valuation Basic Table put out by the Society of Actuaries with the company’s own data. It has also begun efforts to test models by comparing them with data from actual lives in the Medicare database during the 1990s.

 

For now, the question is how much damage has been done already to the settlement market due to the changes. Michael Fasano, president of Fasano Associates, a Washington D.C.-based underwriting firm, notes that “clearly it’s had a chilling effect” on the market, and is one of the reasons for the turmoil being seen in the life settlement industry.

 

Michael Coben, senior vice president of national distribution at Coventry, Fort Washington, Pa., says the changes could have a “significant impact.” But he adds that the effect would be “specific to each provider” based on which medical evaluator the provider uses.

 

At the moment, he says, “firms are re-pricing, and a lot of capital sources are trying to figure out what they want to do.” Coventry has used its own underwriting department to evaluate life expectancy, and has not been affected by the changes, Coben adds.

 

More specifically, Fasano says he expects one form of transaction—those involving financed policies sold not long after the 2-year contestability period has ended—will fade away entirely.

 

“The premium financed part of the market may never recover,” he says, adding that such deals are premised on the idea that the policy could be sold after 2 years, and priced as such. “The only way those numbers work is if your life expectancy is too short,” he says.

 

With longer and more accurate life expectancy medical underwriting, Fasano adds, “there’s really no way you could make a profit.” With a shorter life expectancy report, policies attracted significantly higher prices from funders. But when all the involved players get their piece of the funding pie, and the life insurance company gets its premiums, “the pie is not going to be big enough,” he says.

 

“That may well kill the premium financed part of the life settlement market.”

 

Fasano notes that his company has routinely provided longer life expectancies, and has at times lost business as a result.

 

One of the contributing factors to the problems of inaccurately short life expectancy estimates, he says, has been “an unhealthy misalignment of interests” in some parts of the business, in which brokers and providers put a policy’s potential price and the ability to complete more transactions as their top priorities. “There has been some shopping for short life expectancy estimates,” he said.

 

As a result, significant discrepancies had existed among medical underwriters, or as much as 25% to 30%. This, Fasano notes, “scares off a lot of capital.”

 

Fasano also says he found it difficult to understand the reasoning behind the variance. “We’re all looking at the same data,” he says. While determining a life expectancy is not as simple as some have argued it is, “it’s not rocket science either and I would not expect the differences to be that significant,” he maintains.

 

Now that the announced changes have taken effect, Fasano says he expects it will take about 6 months for the market to work out its uneasiness. After that, he predicts, funders will regain their confidence, or new capital will begin to enter the market.

 

Perhaps most importantly, “I would not imagine, going forward, that you would have changes of that order of magnitude that we have seen in the last few months,” he says. As with his own models, he expects individual companies to fine tune and refine their life expectancy models, but those changes “will be much less extensive,” he believes.

 

Similarly, there will still be differences due to the specifics of their individual models, he says, but “those differences will be significantly less.”

 

By Matt Brady

 

Life, as they say, is for the living, and the same principle applies for life settlements. But advisors can help clients selling their policy to live a little longer by ensuring their long term care needs will be met.

 

Depending on personal circumstances, a client may decide that ensuring adequate LTC is more important than providing a benefit for loved ones after death. In that case, a life settlement can play a role in paying for that care.

A number of older insureds are considering just such an option, says Robert Sweeney, a partner with Life Asset Advisors in Buffalo, New York.

 

“At a certain age, it’s more important to have LTC insurance than to have life insurance,” he says.

Many policyholders reach an age where their house has been paid for and their children have grown and no longer rely on them, Sweeney continues, citing himself as an example. “A lot of people feel that way,” he says.

 

A “core element” of the concept, according to Mark Goldstein, director of advanced markets for Great West Growth Life, is that many individuals who would consider selling a life policy are the same ones who are facing LTC needs.

 

“There’s a tremendous intersection between those who can benefit from a life settlement and those concerned about LTC,” he says.

 

Conducting a life settlement and obtaining LTC coverage are two separate transactions, and one should not be affected by the other, Goldstein points out.

 

A desire to fund LTC, which would be expected to extend the insured’s lifespan, will not affect the settlement process, or the price offered for a policy, Sweeney notes. “They (the funders) don’t care what you do with the funds.”

 

Sweeney says he often makes presentations to insurance agents and advisors regarding the benefits of life settlements, and he includes information regarding the LTC option in that presentation.

 

For the agent, using a settlement to fund LTC can provide an opportunity to receive a “double commission,” he notes. Not only would the agent receive a referral commission for the life settlement, he explains, but the agent would also be compensated for placing the LTC policy for the client.

 

Given the nature of LTC policies, in particular their pricing, policyholders would be best served by shedding unwanted life policies as soon as possible, Sweeney says. In purchasing LTC insurance, he explains, “the younger, the better. LTC insurance is cheaper the younger you are, unless you’re seriously ill.”

 

Once the funds from a settlement are in hand, Goldstein says, the individual has 2 general options. The first, according to Goldstein, is to purchase coverage using a single lump sum payment. There are not a lot of companies that offer that right now, but the number is growing,” he says. Some of these policies offer a degree of flexibility, serving initially as an annuity that can be accelerated to cover LTC costs or even with an added life insurance element.

 

 

As laws governing annuities with LTC features change, Goldstein predicts, “you’re likely going to see more of these.” Currently, money taken out of an annuity to pay for LTC coverage is taxable, he explains, but under the Pension Protection Act, that will no longer be the case starting in 2010.

 

A second option, Goldstein says, would be simply to take the funds obtained in a settlement, invest it, and use the interest payments or dividends to pay the premiums for LTC coverage on an ongoing basis. This option would create greater flexibility and choice for the individual, who would face a wider array of coverage and pricing options that could be tailored to meet their specific needs, he says.

 

As with any financial move, there are inherent risks about which policyholders should be aware and potential alternatives that might be a better fit. “As with any financial transaction, individuals have to look at what is best for them,” Goldstein points out, and they should consult with an expert to evaluate needs and opportunities.

 

Brad Feldman, a vice-president at Birmingham, Mich.-based Schechter Wealth Strategies, says the decision to sell a policy in a life settlement should be based upon a client’s unique circumstances and objectives. “That’s personal choice,” he says, noting that selling a policy may carry unintended consequences that would not occur under other options.

 

“There are some risks that go along with selling a policy,” Feldman says, specifically noting that income gained in the transaction could reduce the client’s government entitlements or benefits which may have been contributing to their LTC funding in the first place. In addition, Feldman points out that proceeds from a settlement may be subject to taxation.

 

However, he adds, if the life policy, and the eventual death benefit, is truly unneeded, then a settlement may be the right solution for a client. “Depending on the client’s health and need for life insurance, it could be a win-win,” he says, noting a client may receive the liquidity from the life settlement to fund LTC needs as well as obtain a replacement life policy that is competitively priced.

 

But other options also exist. For example Feldman points to extra-contractual loans. These are lent based on the life policy’s secondary market value, rather than cash value of a policy. These loans offer many of the same benefits of a settlement, such as immediate funds and elimination of the insured’s needs to pay premiums, while leaving the policyholder at least some portion of the death benefit.

 

At least one notable insurer is starting to offer these extra-contractual loans, Feldman notes, and at least one lending firm has signaled its intent to enter the market.

“The thought is that this will be a competitor for traditional life settlements,” he says, but he cautions that which choice is best for an individual will always differ from one person to the next.

 

The question was: I have a client who is age 66. He has decided to stop paying premiums on his $150,000 term policy. Could he possibly sell it in the secondary market or is the face amount too small?

 

The answer is: There is a market for smaller policies. Some life settlement providers like Coventry First have the ability to purchase policies with a minimum face amount of $100,000. Coventry First’s policy valuation process is expedited through a Simplified Settlement questionnaire, which the insured and owner sign verifying policy information and medical history.

 

For these smaller policies, valuations can be performed quickly upon receipt of the application. Typically, your client’s term policy would have to be convertible, which means you as the advisor could be the writing agent on the converted policy. A win-win for both you and your client.

 

Michael Coben
Senior Vice President, Account Services
Coventry
Fort Washington, Penn.
www.coventry.com
mcoben@coventry.com

By Matt Brady

 

Life, as they say, is for the living, and the same principle applies for life settlements. But advisors can help clients selling their policy to live a little longer by ensuring their long term care needs will be met.

 

Depending on personal circumstances, a client may decide that ensuring adequate LTC is more important than providing a benefit for loved ones after death. In that case, a life settlement can play a role in paying for that care.
 
A number of older insureds are considering just such an option, says Robert Sweeney, a partner with Life Asset Advisors in Buffalo, New York.

 

“At a certain age, it’s more important to have LTC insurance than to have life insurance,” he says.
 
Many policyholders reach an age where their house has been paid for and their children have grown and no longer rely on them, Sweeney continues, citing himself as an example. “A lot of people feel that way,” he says.

 

A “core element” of the concept, according to Mark Goldstein, director of advanced markets for Great West Growth Life, is that many individuals who would consider selling a life policy are the same ones who are facing LTC needs.

 

“There’s a tremendous intersection between those who can benefit from a life settlement and those concerned about LTC,” he says.
 
Conducting a life settlement and obtaining LTC coverage are two separate transactions, and one should not be affected by the other, Goldstein points out.

 

A desire to fund LTC, which would be expected to extend the insured’s lifespan, will not affect the settlement process, or the price offered for a policy, Sweeney notes. “They (the funders) don’t care what you do with the funds.”

 

Sweeney says he often makes presentations to insurance agents and advisors regarding the benefits of life settlements, and he includes information regarding the LTC option in that presentation.

 

For the agent, using a settlement to fund LTC can provide an opportunity to receive a “double commission,” he notes. Not only would the agent receive a referral commission for the life settlement, he explains, but the agent would also be compensated for placing the LTC policy for the client.

 

Given the nature of LTC policies, in particular their pricing, policyholders would be best served by shedding unwanted life policies as soon as possible, Sweeney says. In purchasing LTC insurance, he explains, “the younger, the better. LTC insurance is cheaper the younger you are, unless you’re seriously ill.”

 

Once the funds from a settlement are in hand, Goldstein says, the individual has 2 general options. The first, according to Goldstein, is to purchase coverage using a single lump sum payment. There are not a lot of companies that offer that right now, but the number is growing,” he says. Some of these policies offer a degree of flexibility, serving initially as an annuity that can be accelerated to cover LTC costs or even with an added life insurance element. 

 

As laws governing annuities with LTC features change, Goldstein predicts, “you’re likely going to see more of these.” Currently, money taken out of an annuity to pay for LTC coverage is taxable, he explains, but under the Pension Protection Act, that will no longer be the case starting in 2010.

 

A second option, Goldstein says, would be simply to take the funds obtained in a settlement, invest it, and use the interest payments or dividends to pay the premiums for LTC coverage on an ongoing basis. This option would create greater flexibility and choice for the individual, who would face a wider array of coverage and pricing options that could be tailored to meet their specific needs, he says.

 

As with any financial move, there are inherent risks about which policyholders should be aware and potential alternatives that might be a better fit. “As with any financial transaction, individuals have to look at what is best for them,” Goldstein points out, and they should consult with an expert to evaluate needs and opportunities.

 

Brad Feldman, a vice-president at Birmingham, Mich.-based Schechter Wealth Strategies, says the decision to sell a policy in a life settlement should be based upon a client’s unique circumstances and objectives. “That’s personal choice,” he says, noting that selling a policy may carry unintended consequences that would not occur under other options.

 

“There are some risks that go along with selling a policy,” Feldman says, specifically noting that income gained in the transaction could reduce the client’s government entitlements or benefits which may have been contributing to their LTC funding in the first place. In addition, Feldman points out that proceeds from a settlement may be subject to taxation.

 

However, he adds, if the life policy, and the eventual death benefit, is truly unneeded, then a settlement may be the right solution for a client. “Depending on the client’s health and need for life insurance, it could be a win-win,” he says, noting a client may receive the liquidity from the life settlement to fund LTC needs as well as obtain a replacement life policy that is competitively priced.

 

Other options also exist, however. For example Feldman points to extra-contractual loans. These are lent based on the life policy’s secondary market value, rather than cash value of a policy. These loans offer many of the same benefits of a settlement, such as immediate funds and elimination of the insured’s needs to pay premiums, while leaving the policyholder at least some portion of the death benefit.

 

At least one notable insurer is starting to offer these extra-contractual loans, Feldman notes, and at least one lending firm has signaled its intent to enter the market.
 
“The thought is that this will be a competitor for traditional life settlements,” he says, but he cautions that which choice is best for an individual will always differ from one person to the next.
 

 

The question was: According to a recent Conning study, in roughly what year will the market for life settlements level off?

The answer is: b) The growth in the life settlements market should start to level off in 2012, according to Conning, city state.  Read related article here