Examples of important Life Settlement topics covered by CPE NASBA approved seminar presented by Integrity Life Solutions, LLC – “Life Settlements: Introduction and Best Practices”
Definition: Life Settlement: The purchase of a life insurance policy by an investor (in the secondary market for life insurance) where the policy’s insured is of advanced age (a senior, or otherwise has a relative low life expectancy) for an amount greater than the cash surrender value of that policy.
The growth of the Life Settlement (aka Senior Settlement) market, sometimes confused with Viatical Settlements, per se, is in some measure due to the vast numbers of policies that are subject to purchase and investment. But in the life settlements business, some policies are just better than others for investment. 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 herein.
Free CPE course – what is 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 most desirable to 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 policy holders with greater flexibility in the payment of premiums as compared to traditional whole life policies. Whereas whole life policies, likely the most popular form of permanent policy prior to the advent of UL policies, generally require by their terms periodic premium payments of equal amounts – the level premium – UL policies only suggest a target premium that ought to be paid as per a plan that is developed between the carrier, the agent and the policy holder. However, UL policies will not lapse despite the fact that such target premium has not been paid, so long as the account value within the policy in combination with any additional premiums is sufficient to cover the cost of insurance of the policy for that year, in addition to any other expenses, costs or fees, such as sales expenses, that the carrier is allowed to charge. Investors in the secondary life settlement market will always prefer the flexibility offered by the UL policy in lieu of the rigidity required by a whole life policy, for example. The CPE course for accountants clarifies how investors in the senior settlement market prefer to make minimum and frequent periodic premium payments in order to maximize the utilization of funds and cash flow of their fund or portfolio. In other words, investors or funders in this life settlement space would prefer to use any excess funds for the purchase of additional assets or settle additional policies and not overfund a policy putting the excess cash into the hands of the carrier. Whole life policies do not offer this flexibility to such investors in the life settlement market.
The CPE course also covers the following concept. Because of forced “overfunding” of policies – that is accumulation occurring in the cash account – by whole life policies, it is much more likely to see higher cash surrender values in whole life policies than in UL policies. Because a life settlement, or even viatical settlement, occurs only when an investor is willing to pay an amount higher than the cash surrender value, it is naturally more difficult to achieve such when the cash surrender value is relatively higher. Here again, whole life policies are less desirable from the investors point of view.
Free CPE course – what is said about Term Policies:
Intuition may dictate that term policies are not sellable or marketable at all in the life settlements or senior settlements marketplace. Term policies by definition and by name are for a specific term only – e.g. ten years, or twenty years, even thirty years in some cases. If policies by their nature are likely to lapse prior to the projected life span of an insured, why would any investor be interested in purchasing such policy in the life settlement market to hold it until “maturity”? Is there any accounting value to such assets should they be purchased under these circumstances? CPAs and other professionals ought to understand that many term policies carry what is known in the insurance industry as a “conversion feature” that allows the term policy to be converted to an equivalent face value permanent policy, ordinarily in the form of a UL policy. Such conversion features usually lapse at a precise age, on the birth date of the insured, e.g. age 72 or 75.
Accountants and other professionals who have clients however that possess such term policies ought to be aware of this and advise their clients that if such conversion feature is in place in the policy contract, that they then have the option to make the policy permanent and keep it in force 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 consequent premiums will be pegged at a rating of the insured at the time of policy issuance. For purposes of clarity, this means that if 20 years ago when the insured was 54 years of age, he was rated “preferred” – very healthy – then upon conversion today, at age 74, his “preferred” rating will be imputed to him, despite the fact that his health may have deteriorated in a relative fashion – i.e. he is unhealthy even for a 74 year old. Regardless of constancy of rating, the premiums on a permanent policy will likely increase significantly due to the permanent nature of the policy and the insured’s advanced age.
Nevertheless, Term Policies are excellent candidates in the secondary life settlement because:
1. They possess absolutely no cash surrender value (prior to conversion) which 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 an owner of a term policy, he never intended to keep the policy beyond its initial term, and may not have even been aware of the existence of the conversion feature. Bottom line, the current policy owner may be happy to get something rather than nothing in the case of his merely lapsing the policy – letting it go, so to speak – for failure to convert it.
Finally, as a footnote to this section, the CPE course will point out that providers or buyers may either purchase a term policy prior to conversion by the current owner and convert the policy themselves, or require conversion first by the current owner, and the payment of any conversion premiums, which may or may not be reimbursed by the new owner/investor.
Free CPE course – what is said about other types of policies:
Other policies, such as Variable Universal Life Policies, Index Universal Life Policies, and Survivorship policies are all a variation on a theme. Detailed descriptions of these policy types are beyond the scope of the Free CPE webinar for accountants, CPAs and other professionals. However, suffice to say, they are also generally outside the scope of parameters employed by providers and funders in the life settlement marketplace inasmuch as:
1. They pose difficulty in valuation assessment
2. They pose difficulty in correlating carriers’ illustrations with valuation models
3. There are other simpler forms of policy type in a weak market to purchase 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/funders are less likely to purchase them in view of re-selling assets from their portfolio in the future, for liquidity or profit-taking purposes.
The reader is encouraged to attend Integrity Life Solutions, LLC Free CPE seminars for further information about this and other topics in the life settlement arena. Contact Susan Lubin, CFP at 973.275.1110