Cash when you need it

The World of
LIFE SETTLEMENTS

Overview

Life insurance provides financial solutions to meet various needs of businesses and families. Over time, however, needs change. According to Milliman and Robertson, a leading actuarial consulting firm, 88% of all universal life policies never result in a death claim.

In other words, the policies are surrendered or permitted to lapse. A surrender or lapse is, essentially, a sale of the policy back to the insurance company for the cash value. However, if the insured's health has declined, the insured is no longer insurable in the same rate class; in that case, the policy may be worth considerably more than the surrender value.

At the same time, the senior market was estimated, in 1999, at $492 billion of in-force life insurance policies.

For many years, the insurance companies were essentially the only market for this commodity in which an individual had been investing for years. The advent of a secondary market has now created a free market for policyowners to value their insurance just as they do other financial assets.

A recent article entitled, "The Benefits of a Secondary Market for Life Insurance Policies," published by the American Bar Association (Real Property, Probate & Trust Journal), concludes that the secondary market is both pro-competitive and pro-consumer. We will outline three basic options for managing life insurance assets.

OPTION 1
Why Choose a Life Settlement?

• Policy has become too expensive to maintain.
• Lapsing a policy provides little or no benefit.
• Settlement amount is always greater than the cash surrender value in a policy.
• Day-to-day expenses are not easily met.
• Decline in health has increased medical expenses.
• Health and long-term care have become a financial problem.
• Fear of leaving family burdened with debt
• New tax laws or estate changes have made current life insurance coverage excessive.
• Policyholder living in an assisted care facility has exhausted their ability to pay for their residential care.
• Alternative funding is needed for more suitable financial products.

Consumer Benefits of a Life Settlement

• Receive additional funds to compensate for loss of income since retirement.
• Eliminate premium expense.
• Meet day-to-day obligations and relieve overall financial stress.
• Preserve a high quality of living.
• Obtain increased financial liquidity in varying economic times.
• Maintain control of affairs before passing.
• Observe the benefits of asset distribution.
• Do the things you've always wanted to do in life.
• Enjoy peace of mind.

Financial Planning Benefits

The possibility that a client's insurance policy will have a market value well above its surrender value has at least three major consequences:

1. When estate planners inventory the market value of a client's assets, they'll need to know the fair market value of not only stocks, bonds, and real estate, but also of life insurance policies.
In estimating death taxes, advisors need to consider whether the IRS will value any life insurance policies on others' lives at their fair market value.
In advising clients how to exit from an unwanted insurance policy, planners need to consider whether a life settlement at fair-market value is the most suitable choice.

Ideal Candidates
High net worth clients age 65 and over, with:

• A life insurance policy with a face amount of at least $250,000 (smaller policies can also be marketed);
A change in insurability since the policy was issued;
A life expectancy of 15 years or less.

Tax Implications of a Life Settlement

The sale of a life insurance policy may be a taxable event. Tax experts disagree on the details of taxation, but there is a general consensus that if the cash surrender value of the policy exceeds the premiums paid on it, the life settlement proceeds will be taxed as follows:

• The portion up to the policyowner's investment in the contract will be received tax-free.
The portion exceeding the investment in the contract, but not exceeding the cash surrender value, will be taxed as ordinary income.
The portion exceeding the cash surrender value will be a gain which, in some circumstances, may be a capital gain.

When the cash surrender value of the policy is less than the investment in the contract, the IRS may take the position that only the cash surrender value represents a tax-free return of basis - and everything else is gain on the sale of the asset. This stance is not universally accepted, so professional advice on any particular fact situation is in order.

OPTION 2
A 1035 Policy Exchange

Prior to the secondary market for life insurance, consumers who wanted to retain insurance coverage while eliminating premium payments had few options. Nonforfeiture laws provide for:

1. surrendering the policy for cash; or
2. exchanging it for a paid-up policy with a reduced face amount.

Because both of these options are based on cash surrender value, they frequently undervalue the policyholder's asset.

Programs now exist under the 1035 Policy Exchange that allow a policyholder to transfer an underperforming policy's market value into a new, paid-up policy that can be based on either guaranteed or current rates. By tapping into the market value of the original policy, this exchange provides more coverage than a traditional exchange - more than cash value would provide. As a result, qualifying clients now have a strategy to meet their estate planning needs by retaining a significant amount of coverage while eliminating future premium payments.

This type exchange offers a revolutionary shift in how life insurance assets are managed. Instead of accepting the carrier's nonforfeiture options, advisers are now having their clients' policies appraised on the secondary market. They learn what the policy is worth in cash and as a paid-up policy, allowing them to help their clients use their capital more efficiently.

Consumer Benefits of a 1035 Exchange
The major benefit is providing a more appropriate policy, while eliminating future premiums. Clients can typically:

• Receive a paid-up policy based on market value;
  Create a guaranteed benefit in place of a non-guaranteed benefit.
• Retain a more appropriate level of coverage.
• Upgrade the credit rating of the insurer.
• Create additional disposable income by eliminating future premium payments.

Financial Planning Considerations

Investigating the possibility of the exchange of an existing insurance policy for a more suitable policy provides advisors a powerful tool for enhancing client relationships, enabling advisors to:

• Review a client's portfolio on a regular basis.
Help clients understand the fair market value of their policy.
Assist clients in optimizing their coverage.
Suggest more efficient investment opportunities.

Ideal Candidates for a 1035 Exchange

Ideal candidates for a policy swap are high net worth individuals who wish to reduce or eliminate premium payments while still retaining coverage. Possible scenarios leading to a swap include:

• Existing insurance is performing below expectations.
Client retires or sells a business.
A change in health or marital status
Key employee coverage is too expensive after an executive retires.
Client gifts for premium payments are now subject to gift tax.

In short, life circumstances change, and clients require new tools that enable them to increase the efficiency and performance of their life insurance holdings. This method offers them an extraordinarily powerful new option to maximize their estate.

Requirements

In order to qualify for a program of this type, clients must be 65 years or older, with:

• A life insurance policy with a face amount of at least $4 million.
• A change in insurability since the policy was issued.
• Life expectancy of 15 years or less.

Tax Implications

A policy swap of this type can be considered a 1035 exchange. Naturally, clients should consult their tax advisors to assess their individual tax situations.

OPTION 3
Premium Financing

Premium financing has long been a valuable estate planning tool, particularly useful in the advanced estate and business planning marketplace where clients commonly have large insurance needs and assets they do not wish to liquidate.

Until recently, however, these loans offered to finance life insurance premiums are granted on a recourse basis with significant collateral and/or personal guarantees. With new programs being offered, however, a policyowner can now borrow against the future market value of a life insurance policy. By utilizing a non-recourse loan that is supported by the projected value of the underlying policy, we reduce or eliminate the need for further collateral or personal guarantees.

Consumer Benefits

• Obtain a significant amount of insurance while minimizing the initial outlay.
• Utilize a non-recourse loan with no additional collateral requirements.
• Be free to choose how they wish to proceed at the end of the loan term.

NOTES

1. Loans are generally available for a term of 36 months,with options for 30 and 26 months.
The borrower pays a one-time origination fee, the greater of $5000 or 1% of the loan, at the beginning of the application process.
At the maturity of the loan, the borrower has the choice of either keeping the policy by paying the loan balance, or relinquishing the policy to the lender in satisfaction of the debt.

Ideal Candidates for Premium Financing

• Insured is age 60 or older.
Substantive need for insurance.
Borrower is an individual or a trust (exceptions may be made for other legal entities).
Borrower is a U.S. resident.
Borrower or insured meets financial sophistication criteria.
Insured qualifies medically for the insurance.
Minimum loan size is $100,000.
Carrier rating A or better from Standard & Poor's or A2 or better from Moody's.
All components of the transaction are denominated in U.S. dollars.

Why Endor Consulting?

Our job is to obtain the best settlement rate for your insurance policy. To do so, we market your policy to all 30 institutionally funded life settlement companies currently in the marketplace. We negotiate with them in several rounds of bidding. When we feel we have reached the maximum settlement available, we present that figure to you, for your approval.

The Process

• Insured completes and signs the Life Settlement Application.
Insured signs the HIPPA form.
Insured signs medical release form so we can order medical reports from the last 3-4 years (unless insured already has those complete reports to current).
Insured obtains current illustrations from the insurance company (or signs the form for us to obtain those).
These forms are submitted to all above-mentioned companies who are interested in bidding on the policy.
Interested companies evaluate the policy and send to their underwriters.
First round bids are submitted.
Bidding continues until all parties cease bidding.
Final offer is submitted to you.
Once an offer is accepted, the life settlement company issues closing documents.
After receiving executed closing documents, change of ownership and beneficiary forms are sent to the life insurance company, and the policyholder receives a check for the settlement. (In the case of a 1035 exchange, the new, paid-up policy is issued to the policyholder.)

Our funders all maintain third party escrow and third party management companies to process your personal information. No information is sold, shared or exchanged in any manner. When a bid is unsuccessful on a policy, all information regarding that policy is destroyed.