Background: Many people in their 60’s and 70’s own a life insurance policy purchased in the 1970’s, 1980’s
or 1990’s that is not performing as well as projected at interest rates of those times. Or they find that they no
longer want to maintain policies that they have. They’re sitting in the file cabinet and will likely lapse before the
people die and have zero value to the heirs.
Our Case: We had a client that had a Second-to-Die $3,000,000 life policy with a premium of $90,000 a year.
The client had died but his spouse was doing well…not great, but well! The problem for the heirs was that
even if she kept paying the premium, the policy would lapse around age 85 (she was in her late 70’s at the
time).
The Question: Would it be possible to sell her policy in the settlement market? Could she obtain a new policy
in the alternative company’s marketplace with the health issues she was having?
The Results: We went out to the settlement market and caused a bidding war that ended with her and her
family receiving around $650,000 for the policy she had. Before selling the policy we went to the “new
insurance marketplace” and found the first five companies we talked to saying she was a “decline”, meaning
they would not issue a new policy based on her health. But when we went to company six “bingo”, they said
they would take her as a standard risk. We checked on the costs and found that if we transferred the $650,000
from the settlement sale that we could “buy down” the premium to around $60,000 a year with the Death
Benefit guaranteed to age 120, but premiums only payable to age 100. So we made the move….an arbitrage
between a settlement company that bet she would die soon and our sixth insurance company that said she
would live long!
Bottom Line: Our widow is still alive today and in her early 90’s. The $3,000,000 policy is still inforce and her
health is still somewhat iffy….but so far she has beat the odds. Her premium
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B &E Investment Advisers, Inc. and B&E Pension Advisers, Inc are separate entities from ValMark Securities.
In a life settlement agreement, the current life insurance policy owner transfers the ownership and beneficiary designations to a third party, who receives the death proceeds at the passing of the insured. A policy owner should consider the continued need for coverage, and, if the policy owner plans to replace the existing policy with another policy, the policy owner should consider the availability, adequacy and cost of comparable coverage. A life settlement may affect the insured’s ability to obtain insurance in the future and the seller’s eligibility for certain public assistance programs and there may be tax consequences. A life settlement transaction may require an extended period of time to complete. Due to complexity of the transaction, fees and costs incurred with the life settlement transaction may be substantially higher than other securities. ValMark Securities supervises a life settlements as a security transaction.
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