Life Settlements Taxation Controversy
This is an important follow-up to my “post-AALU” post on the Taxation of Life Settlements. Additional posts on the other subjects covered by Larry Brody and Steve Leimberg will follow in a few days.
New Rulings on Taxation of Life Settlements
CASE STUDY: Failing policy due to the underperformance of cash values
Here we have another classic example of a failing policy due to underperformance of cash values and higher-than-expected cost of insurance. The existing plan was in jeopardy of lapsing. Increasing the premiums from $50,000 per year to $103,000 was simply not an option the client wanted to consider.
Scenario
84 y/o female
Current coverage: $2,000,000 (2 universal life policies)
$1,500,000 (1993, Standard)
$500,000 (1993, Preferred)
Cash Value: $230,000
The New OHIO STOLI Law
The following is a newsletter put out by National Underwriter on STOLI (Stranger Owned Life Insurance).
BY MATT BRADY
Washington Bureau -- NU Online News Service, June 12, 2008, 5:07 p.m. EDT
Ohio Gov. Ted Strickland today signed into law a bill that was written in an effort to root out stranger-originated life insurance.
The new amendments to Ohio insurance law “recognize a shared responsibility of the life settlement industry, life insurance companies and the [insurance] department to protect consumers against STOLI transactions,” says Mary Jo Hudson, director of the Ohio Department of Insurance.
The bill, H.B. 404, officially amends the state Viatical Settlement Act. Under the new law, the department will have more authority over life settlements, and life settlement brokers and providers are required to give insurers more information before engaging in a life settlement.
Life insurers will have to ask specific questions aimed at uncovering STOLI schemes and report suspected schemes to the department.
The Ohio law also limits the ability of consumers who use certain types of premium financing arrangements to sell life insurance policies within 5 years of buying the policies.
How long do life settlement transactions take to complete?
One of the inescapable facts of life settlements is that they take longer than anyone involved wants. But, according to speakers at the recent Life Insurance Settlements Association conference in Washington, D.C., there may not be much anyone can do about it.
“Certain steps have to be done,” such as the underwriting and evaluating of a policy, noted Scott Kirby, co-president of business development and compliance issues for Orlando-based Advanced Settlements LLC.
Life settlement developments
Despite the likelihood of increased regulation of life settlements and of those who play a role in arranging for life settlements, as well as longer life expectancies potentially leading to lower offers, it is expected that the life settlement industry will continue to grow and flourish, especially with more and more institutional money entering the picture.
Earn Six-Figure Insurance Commissions From Life Settlements
A recent survey by the Life Insurance Settlement Association and Agent Media determined that in 2005 only 18% of all agents engaged in a life settlement transaction.
This year, 2007, 31% intend to engage in a life settlement transaction, and near 50% of the respondents now believe “there is a substantial potential for additional income from life settlements.”
Why the change?
Although the study did not indicate the reason(s), I believe, It has mostly to do with agents discovering that they can increase their insurance production through the proper use of life settlements. In other words, agents are utilizing life settlements to produce additional life insurance premium.
Take the time to understand the life settlement “game,” and use this knowledge to generate more six-figure life insurance premiums!
Below are two examples of how a settlement/new insurance sale was the best option for the client.
A recent survey by the Life Insurance Settlement Association and Agent Media determined that in 2005 only 18% of all agents engaged in a life settlement transaction.
This year, 2007, 31% intend to engage in a life settlement transaction, and near 50% of the respondents now believe “there is a substantial potential for additional income from life settlements.”
Why the change?
Although the study did not indicate the reason(s), I believe, It has mostly to do with agents discovering that they can increase their insurance production through the proper use of life settlements. In other words, agents are utilizing life settlements to produce additional life insurance premium.
Take the time to understand the life settlement “game,” and use this knowledge to generate more six-figure life insurance premiums!
Below are two examples of how a settlement/new insurance sale was the best option for the client.
Understanding the Underwriting Process and Timeline
Knowing the basic timeline prior to submitting a case allows you to set expectations, which gives you and your client a better idea of what to expect. Below is the process and timeline we utilize at Provada, which is fairly typical of well-run Brokerage General Agencies. The first part of this post is specific to life insurance policies while life settlement processing is 
discussed at the end.
APPLICATION SUMBISSION:
- Allow 4-6 weeks for a simple application.
- Most Brokerage General Agencies (BGAs) process applications within 24 hours of receipt.
- If medical records are required, allow for 2 additional weeks. This can vary depending on the applicant’s doctor’s ability to get the records out to the BGA.
UNDERWRITING REQUIREMENTS:
- Clients are typically contacted by the paramedical firm with 24 hours of the requirements being ordered.
- BGAs are typically updated weekly by the paramedical facility.
- Once the exam is completed, results are received within 5-7 working days.
- An average turn around time of 10-14 working days for medical records ordered from doctors and medical facilities.
Small Face Amount Life Settlement Programs Launched
Several life settlement providers have recently launched small face amount programs for policies under $500,000. Backed by large institutional funding, the "SFP" program is a simple and fast way to include Life Settlements in your insurance practice!
With just the application and illustration, your client can receive a competitive Life Settlement offer for qualifying policies!
Frequently Asked Questions about Life Settlements
WHY SELL A POLICY?
Life insurance policy owners find many reasons to consider a life settlement including:
- Underperforming policies: If a policy is performing worse than originally illustrated, the process of a life settlement can be used to purchase more affordable insurance unlikely to fail. This is useful for both trustees of ILITs and individual policy owners.
- Unneeded policies: Policies that have outlived their usefulness are excellent settlement candidates. Changes in insurance needs, divorce, estate planning goals, and/or personal finances can make current life insurance programs obsolete. Policy owners can settle unwanted and unneeded life insurance policies and then use the proceeds for any legitimate reason.
- Business changes: “Key person” policies can be settled when an executive leaves the company. Insurance used to fund “buy/sell” agreements becomes a settlement candidate when the agreement dissolves or is modified. Failing policies within pension plans can be “rescued” in some instances with a life settlement.
WHAT TYPES OF POLICIES CAN BE SOLD?
Almost any life insurance policy, or even a variable annuity, may be sold if it meets established requirements. These include:
- Whole Life (if cash value is low)
- Universal Life (Basic UL, GUL, 2nd to die, etc.)
- Variable Life (security laws may apply)
- Term Life (once converted)
- Variable Annuities (particularly those with “high water mark” death benefits”
Policies most likely to receive higher offers have the following characteristics
-
The insured is a senior with a
life expectancy of less than 20 years; - The face amount is over $100,000;
- The cash value is less than 30% of the face amount;
- There are no substantial loans on the policy; and
- There is a low premium-to-face amount value ratio.
- The policy is beyond the contestable and suicide periods.
WHY SELL A POLICY?
Life insurance policy owners find many reasons to consider a life settlement including:
- Underperforming policies: If a policy is performing worse than originally illustrated, the process of a life settlement can be used to purchase more affordable insurance unlikely to fail. This is useful for both trustees of ILITs and individual policy owners.
- Unneeded policies: Policies that have outlived their usefulness are excellent settlement candidates. Changes in insurance needs, divorce, estate planning goals, and/or personal finances can make current life insurance programs obsolete. Policy owners can settle unwanted and unneeded life insurance policies and then use the proceeds for any legitimate reason.
- Business changes: “Key person” policies can be settled when an executive leaves the company. Insurance used to fund “buy/sell” agreements becomes a settlement candidate when the agreement dissolves or is modified. Failing policies within pension plans can be “rescued” in some instances with a life settlement.
WHAT TYPES OF POLICIES CAN BE SOLD?
Almost any life insurance policy, or even a variable annuity, may be sold if it meets established requirements. These include:
- Whole Life (if cash value is low)
- Universal Life (Basic UL, GUL, 2nd to die, etc.)
- Variable Life (security laws may apply)
- Term Life (once converted)
- Variable Annuities (particularly those with “high water mark” death benefits”
Policies most likely to receive higher offers have the following characteristics
-
The insured is a senior with a life expectancy of less than 20 years;
- The face amount is over $100,000;
- The cash value is less than 30% of the face amount;
- There are no substantial loans on the policy; and
- There is a low premium-to-face amount value ratio.
- The policy is beyond the contestable and suicide periods.
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