 LIFE
SETTLEMENT
The NAIC Model Act defines a life settlement broker as:
“a person that on behalf of a policy owner and for a fee, commission or
other valuable consideration offers or attempts to negotiate life settlement
contracts between a policy owner and one or more life settlement providers. Notwithstanding
the manner in which the life settlement broker is compensated, a life settlement
broker is deemed to represent only the policy owner and owes a fiduciary duty
to the policy owner to act according to the policy owner’s instruction
and in the best interest in the policy owner.”
What is Life Settlement?
Life Settlements enables individuals, businesses, and/or organizations to
sell life insurance policies they currently own, but no longer want or
need, for an amount greater than the cash surrender value on the secondary
market.
As an alternative to surrendering the policy, this process allows
policy owners to receive the greatest value from an asset they
no longer wish to maintain.
Life Settlement are designed to specifically serve the needs
of:
Individuals
70 years or older who may be experiencing a change in health
Individuals
whose estate taxes are changing
Individuals
who outlived the beneficiaries of the policy
Individuals
who own more insurance than presently needed
Individuals
who needs funds for alternative investments.
Individuals
who needs funds for alternative investments
Individuals
whose financial stress will cause a lapse in the policy
Individuals
Selling a business
Partners
whose Buy/Sell agreement is no longer needed
Company
owned Key-Man policy where the executive is retiring
Individuals
who wish to achieve their charitable giving objectives
All policy types qualifying includes:
Group
Term
Whole
Life
Survivorship
Universal
Life
Variable
Universal Life
Key-Man,
etc.
The tax consequence when Selling a Policy
See your tax advisor for advice
In a Life Settlement transaction, the proceeds are treated as
if the policy was first surrendered and then sold as an investment
No tax is due on the proceeds received up to the cost basis (premium
paid minus non-taxed dividends) as it is treated as return of premium.
The difference between the cost basis and the cash surrender
value is taxed as ordinary income.
Finally, anything above the cash surrender value is treated as
capital gain.
Example:10-year-old policy, $1,000,000 Policy Face Value, cash
value $10,000, sold for $200,000.
Top
| Taxed As Capital Gain $140,000 |
| Cash Value Taxed As Ordinary Income $10,000 |
| Cost Basis Return of Premium $50,000 |
Procedure for evaluating or selling a policy
THIS IS DONE IN COMPLETE CONIDENTIALITY
1. The policy owner completes an application along with signed
authorizations.
2. We will gather all the necessary documentation (ie: Attending
Physician Statements, Policy illustrations, etc…).
3. The file is submitted to select funding organizations for
independent review.
4. A biding contest is created to obtain the highest offer for
the policy owner.
5. The offer is relayed to the policy owner for acceptance.
6. Once the offer is accepted, the contract is sent to the policy
owner / and insured for review and signatures.
7. The signed contract is sent back to the funding company. The
funding company sends the appropriate documents to the insurance
company to change the ownership and beneficiary information on
the policy.
8. Once Change of ownership is completed and verified, the funds
are wired to the bank account designated by the policy owner.
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