A life settlement is the sale of a life insurance policy to an institutional third party for more than the cash surrender value and less than the death benefit. The policy is transferred to an institutional third party for a lump sum consideration. The institutional third party becomes the owner, beneficiary and will pay all future premiums on the transferred policy.

The typical candidate for a life settlement is at least 65 years old, the face amount of the policy is $250,000 or higher, the policy form can be convertible term life insurance, whole life insurance, universal life insurance, variable life insurance or even survivor life insurance. Policies must be beyond the contestability period and the insurance carrier must be financially strong, with typically at least an "A" rating from Standard & Poor's, Moody's, Best's or Fitch. Most often, the insured has experienced some change in health since the policy was originally issued and the life expectancy of the insured is generally greater than 2 years and less than 15 years.

The amount offered for a policy varies and is based on the following factors:

• The age and health condition of the insured (life expectancy);
• the amount of premium required to keep the policy in-force;
• the amount of any loans against the policy;
• the issue date of the policy.

Offers vary widely, usually between 10% and 70% of the net death benefit.

A life settlement is distinguished from a viatical settlement in that a viatical settlement is applicable where the insured is considered terminally ill and has a life expectancy of 2 years or less.

The Market for Life Settlements

The fastest growing segment and most affluent segment of the population are those over age 65. It is interesting that those over age 65 are experiencing an increase in their life expectancy, they are concerned about outliving their resources and they own over $492 billion of life insurance.

Life Settlements first appeared in the late 1990's. According to a study by Conning and Company an estimated $1.2 billion of life settlements were transacted in 1999 and $1.6 trillion of life insurance lapsed, expired or was surrendered in 1996. Conning and Company estimates that the potential market for life settlements is over $100 billion. A study conducted by the Warton Financial Institution of the University of Pennsylvania in 2002 estimated that $1.5 billion of life insurance face amount would be sold to life settlement companies by year-end. The study estimated that in 2002, the purchasers paid $336.3 million to acquire policies with a total cash value of $93.4 million. Research indicates that the industry is able to offer approximately 3.6 times the cash value of the policies it purchases.

Reasons to sell a life insurance policy

• Premiums paid by the policy holder have become unaffordable and the policy is in danger of lapsing;
• Estate planning needs of the insured have changed significantly;
• Funds are needed for long-term health care;
• Beneficiary has changed because of death or divorce;
• Disposal of unneeded "key-man" insurance or other business-owned insurance;
• Fund new annuities, life insurance or investments;
• Satisfy the need for cash in a forced liquidation due to bankruptcy or financial difficulties;
• Liquidate policies donated to not-for-profits; or
• Dispose of policies that no longer are needed or wanted for variety of other reasons.

What are the income tax consequences of a life settlement?

Contact a tax attorney or professional financial planner for complete information on your home states rules and regulations. Typically, consideration paid to the policy-owner shall be taxed as follows:

• Up to basis the consideration is income tax free;
• From basis to the cash surrender value the consideration is ordinary income;
• From cash value to the settlement price the consideration is long-term capital gain.

Liquidate Life, LLC

15535 Curwood Drive

Colorado Springs, CO 80921

Phone: (720) 988.3904

Email: info@liquidatelife.com

Not available in all States