Checklist: The Top 11 Questions You Have To Answer Before Getting a Life Settlement
There are many hidden roadblocks that can slow down a Life Settlement, or even make it impossible. Insurance policy owners often do not know they have a problem – until it is too late.
We have compiled 11 of the most critical questions we ask our clients. These questions can uncover the many hurdles that slow down, defer or even stop a Life Settlement if not resolved quickly.
Question 1: Has the policy ever lapsed or been terminated?
If the answer is yes, there are two extremely important questions that must be answered and understood. If no, you are good to move on.
A: If yes, were the 24-month Contestability and Suicide Exclusion Clauses reactivated?
If they were, the policy cannot be sold until 24 months have elapsed since the policy was restored to good standing. All but 5 states ban Funders from buying policies that are still subject to both of these 24-month Clauses, and they are Alabama, Missouri, South Carolina, South Dakota, and Wyoming.
B: If yes, was the lapsed policy reinstated after new medical underwriting?
Carriers will only reinstate a policy if the Insured’s health is essentially unchanged since the policy was originally issued. There could still be a chance for a Life Settlement, though most Life Settlements are possible because the Insured’s health has declined since the policy was put in force.
Lapsation is a complex topic, especially as carriers vary as to their procedures for allowing a lapsed policy to be reinstated. Life Settlement Funders must receive full documentation from the carrier about policy lapsation. Whenever possible, the Policy Owner should avoid lapsation as insurability may be here today and gone tomorrow.
Getting quotes before running out of money is our default recommendation.
Question 2: If the policy is Convertible Term, what is its deadline for conversion?
Convertible Term policies offer the highest payouts of all types of life insurance and are converted by Funders as part of the Life Settlement transaction. It is crucially important for Owners of Convertible Term policies to know the last day that the policy may be converted. If a Term policy cannot be converted before the deadline, it will be very difficult to sell unless the Insured is terminally ill. A good rule-of-thumb is to begin the Life Settlement appraisal-and-bidding process at least 12 months before the conversion deadline.
Question 3: Is there an Assignment on the policy?
Assignments of any kind or amount must be removed before a policy can be sold.
Business owners sometimes must place a Collateral Assignment on a policy in order to secure a loan. Full documentation will be required showing why the loan was placed, who lent the money, and that the Collateral Assignment has been released. Confirmation from the carrier showing the removal of the Collateral Assignment will also be needed.
Some Divorce Agreements contain a requirement to pay the ex-husband or ex-wife a stipulated sum of money, and that is another cause for an Assignment. For more about divorce, see question 4.
Question 4: Has the Policy Owner ever been divorced?
If the Ex- was ever a Beneficiary, and is no longer, Life Settlement Funders must receive a complete copy of the Divorce Agreement no matter how long ago the divorce occurred. Funders must also be certain that the policy is not encumbered by an Assignment of some benefit, and/or a legal requirement to keep the policy in force. If a copy of the Divorce Agreement cannot be found, the CDC has a handy link for securing records on marriage, birth, divorce, and death: https://www.cdc.gov/nchs/w2w/.
Question 5: Has the policy been in force less than 24 months?
State regulations in all but 5 states require that a life insurance policy cannot be bought by Funders until it has been in force at least 24 months. These regulations prevent policy sales before the expiration of the 24-month Contestability and Suicide Exclusion Clauses. Once a policy has been in force 24 months, the Contestability and Suicide Exclusion Clauses expire. The 5 states without any Life or Viatical Settlement regulations are Alabama, Missouri, South Carolina, South Dakota, and Wyoming.
Question 6: Is the policy now in the “Grace Period” of 30 to 31 days?
If yes, the policy must be brought back to good standing before carrier software will allow the creation of essential premium illustrations. A Life Settlement Application should be submitted while the Owner is sending enough money to catch up on premiums per the carrier’s instructions.
Question 7: Has the Policy Owner ever filed for bankruptcy?
Life Settlement Funders must receive a copy of the Bankruptcy Discharge or Termination in order to issue firm quotes, no matter how long ago the Bankruptcy occurred. This document should accompany the Life Settlement Application or be sent within 5 business days after submission.
Question 8: Does the Insured have a competency or communication problem?
The legal issue of competency is a vitally important and sensitive issue. Every Life Settlement contract requires a “Letter of Competency” from the Insured’s physician stating something along the lines of, “I have the determined that: (1) the patient is under no constraint or undue influence; (2) the patient is of sound mind.”
Most Insureds have symptoms of impairment long before they become functionally and legally incompetent. But tragic events and illnesses can strike anytime, such a massive stroke, aggressive ALS, or a disabling accident. Trusted legal advice will be needed to determine how best to handle the Insured’s financial affairs, in addition to those pertaining to health care. The Durable Power of Attorney [“DPOA”] uniquely remains in force should the Insured become incompetent. The DPOA is a private document between individuals and created by their attorney. The person with DPOA may sign the Life Settlement Application and all subsequent documents pertaining to the Life Settlement transaction.
The very real challenge is that the Insured needs to be competent in order to effect granting DPOA to an individual. If, however, the Insured becomes incompetent before the document is in force, the family may have to use the public court system to apply for some form of Conservatorship of the Estate, of the Person, or both. The court maintains supervisory oversight. Conservatorships vary among the states which authorize them, and some are structured to allow policy sales in the same fashion as a DPOA. Finally, Life Settlement Funders need a complete copy of whatever form of financial control has been put in place on behalf of the Insured.
Documentation of this sort only needs to accompany the Life Settlement Application when the Insured, or Owner if other than Insured, is no longer legally competent and thus the Application is signed by the person with the legal power to do so.
The Durable Power of Attorney is among the most important components of an estate plan regardless of one’s assets. The other Others include Health Care Power of Attorney; Living Will; and, Last Will and Testament. Everyone needs the guidance of a qualified attorney to prepare these documents and update them as needed.
Question 9: Has the Insured or Policy Owner lost a Social Security card?
The Life Settlement Application requires the Social Security numbers of the Insured and Owner if other than Insured, and same for their Driver’s License. Clear copies of both are needed at the time of contracting. It is best to replace such missing documents ahead of need.
Use this link to manually replace a Social Security card if you live in one of the 18 states not yet certified by Social Security to use its online replacement system: Alabama, Alaska, Connecticut, Georgia, Hawaii, Kansas, Minnesota, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Utah, or West Virginia: https://www.ssa.gov/forms/ss-5.pdf This method takes longer and may require documentation.
The CDC link shows how to secure public records for birth, marriage, divorce, and death: https://www.cdc.gov/nchs/w2w/
If you do not live in one of the 18 states listed above, you may use Social Security’s rapid online replacement system:
Question 10: Is the policy owned by a Trust that is unclear as to whether the policy may be sold?
If yes, the Trustee would need to amend the Trust to allow a policy sale
Question 11: Does the Insured have Group Insurance? If so, what kind?
Group life insurance is offered in every Group Insurance Plan. It is a great benefit, but
while the Insured is employed, the coverage cannot be sold.
Whether it can be converted to a personal policy and then sold depends on the employer’s contract with the carrier, and whether it is a private entity or the Federal Government.
Getting past the starting line is half the battle in Life Settlements
Selling your life insurance policy seems like it should be easy. After all, you own the policy and you have paid premiums on it for years. Unfortunately, there are many hidden roadblocks to life settlements due to the complexities of the many types of insurance, carriers and funders. We hope these questions help guide you through the policy sale process, just as we guide our own clients to successful sales every day.