How to Overcome 20 Life Settlement hurdles
[Part one] Policy Issues
In this three-part series, we identify conditions that may impact your Life Settlement.
Part 1: In part 1 we cover 12 issues with the life insurance policy itself. These issues include the Term Conversion deadline, Grace Period, Lapsation, and types of life insurance.
Part Two: Discusses 5 typical issues involving the Insured and/or the Policy Owner
Part Three: Reviews 3 common concerns with the carrier (life insurance company).
Issue #1: The Term Conversion deadline
Life Settlement Providers prefer buying Convertible Term life insurance policies more than all other types of life insurance combined. Providers need to submit conversion paperwork before the policy’s contractual deadline. This procedure enables Providers to pay more for the policy because they avoid the skyrocketing premiums of Term policies that cannot be converted, and they receive commissions.
A good strategy for Policy Owners is to begin the Life Settlement process at least a year before the conversion option expires. They should contact the carrier if uncertain of the exact day, month, and year of the conversion deadline. Non-Convertible Term policies may be saleable only if the Insured is seriously or terminally ill.
A final point: conversion to Universal Life will always yield more and higher Life Settlement offers than converting to Whole Life. See Number 11.
Issue #2: Life Insurance Policy Grace period
Term Life insurance premiums must be paid on time to keep the policy out of the “Grace period.” Life Settlement Providers will not make firm offers until they receive premium illustrations from the carrier, and carrier software is disabled during the Grace period. 30 days is the typical Grace period for a Term policy before it will lapse.
Universal Life and Whole Life policies have internal cash value accounts, but they can still slide into the Grace Period if enough money is not available. As with Term policies, carrier software cannot generate premium illustrations during the Grace period and Life Settlement Providers will not make firm offers until the policy is again in-force. Grace periods for these permanent life insurance policies might be as long as 60 days before they lapse.
Issue #3: Policy Lapsation
Policy Owners should do everything possible to keep a policy from lapsing. A lapsed policy no longer pays a death benefit. Reinstating a lapsed policy requires new medical underwriting which may range from a written questionnaire to a full exam and copies of medical records since policy issuance. If the Insured’s health rating is accepted by the carrier as being the same as when the policy was issued, the Policy Owner would then have to pay a specified amount of money to the carrier. Whether this makes sense depends on the specific goals of the Owner.
For example, almost all successful Life Settlement Insureds have experienced a material decline in health since policy issuance, so very few of such individuals would qualify for policy restoration. That means the policy would most likely be terminated by the carrier.
Conversely, an Insured healthy enough to qualify for life insurance at the same rating as the lapsed policy may just about count on its revival. That is good news if the Owner’s goal is to keep the policy. However, the fact the policy could be revived would make it far less likely to get a Life Settlement. Another negative factor for a Life Settlement would be the resumption of the 24-month Contestability and Suicide Exclusion clauses coincident with the lapsed policy’s being put back into good standing.
Issue #4: 24-Month Contestability and Suicide Exclusion clause
New personal life insurance policies are issued with 24-month Contestability and Suicide Exclusion Clauses. Carriers will investigate any death within those 24 months and deny payment of the death claim if the Insured made a legally material misstatement on the application or committed suicide. Life Settlement Providers no longer buy policies until these clauses have expired, whether 24 months after policy issuance or after a lapsed policy has been reinstated.
Issue #5: Legal Assignment of some death benefit
Some Divorce Agreements mandate by an Assignment that the policy must pay a specific amount of money to a former spouse. A business loan may require a Collateral Assignment of some or all of a policy’s death benefit. Sometimes a Divorce Agreement or business contract will require the policy to be maintained in-force until the Insured’s death or a specific date. All assignments must be removed before firm Life Settlement quotes will be offered.
Issue #6: Policy domicile state regulations
The business of insurance is regulated not by the Federal Government but by each individual state, the District of Columbia, and Puerto Rico as a result of the McCarran-Ferguson Act of 1945. In some states, there are restrictions on how soon a policy may be sold for a Life Settlement after it has been issued. In turn, there are detailed exemptions to the regulations. Life Settlement Brokers understand this patchwork quilt of laws and regulations and advise their clients accordingly.
Issue #7: Cost of Insurance increases
Certain carriers have been raising their Universal Life COI (Cost of Insurance) charges, which in turn increases premium cost for existing Policy Owners including Life Settlement Providers.
Numerous individual Policy Owners have been seeking restitution through legal means. In 2018 John Hancock settled for $91.25 million and Transamerica for $195 million. Several other individual and class-action lawsuits are in progress.
Issue #8: The age of the Policy
A policy’s age is important for several reasons. Life Settlement Providers vastly prefer Life Settlement cases where the Insured’s health has declined since policy issuance. The greater the health problems, the more likely is a Life Settlement. Typically, the longer a policy has been in force, the easier it may be to sell. An exception is a Convertible Term life insurance policy, which always has a conversion deadline. Conversely, an Insured who is still insurable at the original rating will usually be much less likely to receive an acceptable offer.
Issue #9: Flawed Trust document
Some policies owned by a Trust may not be sufficiently clear about the Trustee’s ability to sell them. Documents of this sort need to be amended so that the Trustee is not prevented from selling policies for a Life Settlement.
Issue #10: Group Life Insurance Issues
Group Life insurance, issued by private companies or a governmental agency, is very different from privately-owned life insurance policies. Briefly, employees cannot sell their Group Life coverage because they do not own it. They may or may not be able to convert some or all of their coverage to a private life insurance policy upon retirement or leaving on disability. If the conversion option is Universal Life, there could be a Life Settlement opportunity. However, if Whole Life is the only option, a Life Settlement after leaving employment could be very difficult unless the Insured is seriously or terminally ill. Life Settlement Providers cannot buy a Group Certificate of Coverage.
Issue #11: Whole Life Insurance Issues
Whole Life is the costliest form of personal life insurance and is the most difficult to sell for a Life Settlement. Whole Life is designed so the policy’s cash value will equal the face amount at 100 or earlier unless designed as a paid-up-at-65 product. The resultant premiums make Whole Life unaffordable to Life Settlement Providers except for severely to terminally ill Insureds.
Issue #12: No ADB (Accelerated Death Benefit) terminal illness feature
HIPAA brought into being two tax-exempt outcomes for life insurance policies starting in 1997, one of them being the ADB (Accelerated Death Benefit) feature. ADB is a loan from the carrier for 15% to 75% of the death benefit if the Insured meets the carrier’s definition of terminally ill. Guidelines are usually a maximum of 6 months lifespan, although some policies accept 12 months. Life Settlement Brokers know this is the fastest way for the Policy Owner to get money and should urge filing of the ADB Claim, although they are not compensated on that transaction.
Congress did not mandate the ADB feature for all life insurance and many older policies do not have it. A Viatical Settlement is the other HIPAA option available to most Policy Owners when the Insured has a written medical opinion of probable death within 24 months or less. Sometimes the Owner will find the Viatical Settlement pays more now than the ADB or will sell the balance of the policy after transacting the ADB. If the Insured cannot secure a HIPAA-certifying letter from an attending physician, the policy could still be sold but not as a tax-exempt Viatical Settlement.
To know if a Life Settlement can go forward now, we need basic information about the policy. The above life insurance policy topics need to be reviewed and any potential problems addressed.
In Part Two we review issues with Insureds and/or Owners.
Part Three is devoted to carriers.
We hope you find all this of value!