Life settlement

A life settlement is a financial transaction in which a policyowner possessing an unneeded or unwanted

life insurance policy sells the policy to a third party for more than the cash value offered by the life

insurance company. The purchaser becomes the new beneficiary of the policy at maturation and is

responsible for all subsequent premium payments.

Life settlements are an important development in that they have opened a secondary market for life

insurance in which policyowners can access fair market value for their policies, rather than accepting

the lower cash surrender value from the issuing life insurance company.

Generally speaking, life settlements are an option for high-net-worth policyowners age 65 or older.

Independent estimates report that among this group, 20% of policies have a market value that exceeds the

cash value offered by the carrier. And while many policyowners are unfamiliar with life settlements

until a financial professional mentions the option to them, the concept has gained attention from high-

profile proponents such as Warren Buffett, former U.S. Representative Bill Gradison, and numerous media

sources including The Wall Street Journal, Time Magazine, Business Week and The Economist. A growing

number of experts now believe that informing clients about offering life settlements should fall under

the fiduciary duty of a financial advisor.

How It Works

In a life settlement transaction, there is a chain leading from the seller of the policy to the end

buyer of the policy (known as a life settlement provider). Each link in the chain has a different

responsibility in facilitating the transaction and ensuring that it runs smoothly, while outside vendors

typically assist the provider with specialized functions.

Policy Sellers

Candidates for life settlements are policyowners over the age of 65 who no longer want or need a

particular life insurance policy. Life settlement candidates generally have a life expectancy between 2

and 20 years. There are certain restrictions for their policies as well - policies must be valued at

$50,000 or more, and depending on the life expectancy determination of the seller, any and all types of

policies can be sold, ie; universal life, whole life, or convertible term contracts.

Financial Advisors

Life settlements are complex financial transactions that are generally conducted on behalf of clients by

experienced professional advisors. Some examples of advisors that are becoming increasingly involved in

the life settlement arena are:

* Accountants/CPAs
* Attorneys
* Financial Planners/CFPs/ChFCs/CFCs
* Insurance Advisors
* Estate Planners/CEPs
* Certified Senior Advisors/CSAs
* Charitable Trust Officers

Providers

Life settlement providers serve as the purchaser in a life settlement transaction and are responsible

for paying the client a cash sum greater than the policy's cash surrender value. The top providers in

the industry fund many transactions each year and hold the seller's policy as a confidential portfolio

asset. They are experienced in the analysis and valuation of large-face-amount policies and work

directly with advisors to develop transactions that are customized to a client's particular situation.

They have in-house compliance departments to carefully review transactions and, most importantly, they

are backed by institutional funds.

Life Settlement providers must be licensed in the state where the policy owner resides. Approximately 41

states have regulations in place regarding the sale of life insurance policies to third parties.