General Insurance Policy Sale & Life Settlement FAQs

Cases that are run through our company may be submitted to as many as 5-20 companies including the ones advertising on TV. Robust competition ultimately yields the best offers for as many Programs as possible. The Policy Owner may then select the one that is most appropriate. We answer questions fully and provide additional information by Email as needed.  Counsel, suggestions, and advice are shared as if the client were a family member, and conversations are 100% confidential.

The short answer is yes. It’s the some cash now, and some cash later solution..either by keeping the remaining policy to maturity or selling it before then. The idea sounds appealing and it can be made to work. However, it is usually better to keep part of the old policy to maturity and not plan to sell it.

This is a complex topic which we will briefly explore in this space and can do more definitively by phone and Email.

The Long Answer

First, this novel strategy requires a Convertible Term policy that has at least 5 months to go before its Conversion Privilege expires. The Policy Owner would keep part of the policy as-is, continue paying premiums and sell the balance. Funders usually convert policies at their expense as an integral component of the Settlement process.

Second, when a Policy Owner insists on cash now and benefits later, we would propose several things: (A) Ask for quotes for the entire policy as well as the smaller amount left after the Policy Owner keeps some. (B) These quote requests would include the Retained Benefit Life Settlement, which is the closest match and has the additional virtue of requiring no premium payments. (C) The Long-Term Care Life Settlement could work if the Insured is presently receiving some form of licensed Long-Term Care or may need some within 90 days. (D) We routinely ask for all-cash Life Settlement offers, and for Viatical Settlement when the Insured’s Doctor will probably sign a HIPAA-compliant 24-month letter. The Private Policy Loan has the same 24-month timeline but does not require the HIPAA letter.

Third, we would assist the Policy Owner in thinking about the premiums required to pay for a partial policy until the Insured’s likely death. We routinely caution that non-convertible Term policies are inherently harder to sell because their premiums increase over time and Funders vastly prefer level premiums.

Fourth, the size of the remaining non-convertible Term policy would be another important consideration, along with the Insured’s lifespan as determined through underwriting.

Fifth, completing the Quote information or calling starts the process. It takes time and effort, all of which can be rewarding and instructive. We have the knowledge and time if you have some interest.

It has been estimated that $180 billion of life insurance is irrationally terminated every year without trying to sell for a Life Settlement or Viatical Settlement. The reason this is deemed “irrational” is that our Industry has historically delivered 4 to 8 times more than the cash surrender value of Universal Life and Whole Life policies. Term life insurance policies are the most popular, are inexpensive, and have no cash surrender value. By contrast, other Term-type policies such as car and house insurance are unsaleable. In 2014 and again in 2015 only $1.7 billion of life insurance was sold. Policy Owners are leaving tons of money on the table. Our company exists to help more of them do a lot better.

Insureds and Policy Owners need more guidance. We work with all varieties of professional advisors whose clients own life insurance, so please refer them to us. Or, please visit our advisors page.

Carriers claim that Life Settlements will drive up the cost of life insurance because they will have to pay more death claims.

The facts say otherwise.

Americans own $20 trillion of life insurance. But just $1.7 billion of life insurance was sold for a Life Settlement in 2014 and again in 2015. Carriers have known for more than 100 years that relatively few policies will be in force when an Insured dies. As a result, the Life Insurance Industry continues to stable, secure, and relatively profitable through bad times as well as good.

Carriers increasingly make the process of appraising policies take twice as long as it should. A clerk needs just 15 minutes to create a current assumption hypothetical premium assumption at outset of underwriting or to change ownership and beneficiary in order for the Funder to fund. Yet delays of 3 to more than 4 weeks may elapse before the correct illustrations arrive, after carrier delays and mistakes. Policy changes regularly consume 2 to 3 weeks. These delays greatly irritate Insureds and Policy Owners if other than Insureds. Tremendous and permanent ill-will is generated. Those impacted tell everyone they know about their bitter experiences with carriers. Yet most carriers become more obstructive as the years go by.

Carriers could make their policies much stronger if they truly wanted to help the Insureds and take away a large portion of our business. The Accelerated Death Benefit (ADB) feature is tax-exempt for Insureds with up to 24 months of probable life. Yet in 2017 most ADB Claims require the Insured’s Doctor to sign a legal document estimating likely death with 6 months or less, through some policies will accept 12 months or less. It is within this 12-to-18 month gap that our company serves those whom carriers ignore. Carriers could also remove their total cash payout caps so the dying Insured could qualify for ADB on more than $1 million of coverage, whereas we have no upper limits. For more information please visit our Accelerated Death Benefit page.

Carriers should actually be in favor of Life Settlements because they give a strong incentive for owning life insurance, especially beyond age 65. This is one of the core messages that we share with Advisors who sell life insurance.

Please visit our Life Settlements page for more details.

Many carriers forbid agents to broker policies for sale or loan because they so dislike Life Settlements. Also, most securities-licensed agents must receive written Broker-Dealer permission or risk termination because any unauthorized financial transaction may be deemed as “Selling away.” That is a very serious complaint that sometimes results in revocation of the securities license, a far greater challenge than just being fired.

Our company has a certain amount of sympathy for “captives” who fear unemployment more than their clients’ irritation at having to seek external guidance for Life Settlements. Yet many Life Settlement Brokers sell financial products. What better time to get new clients than after delivering needed cash or Long-Term Care Benefit? It was this experience that convinced us to migrate into Life Settlements, as bringing cash to the living is, for us, far more upbeat than delivering death claim checks. For the record, American Life Settlements is completely independent does not sell any products.

Our company seeks referrals to professionals whose clients own life insurance policies. Find out more on our Advisors page.

Funders and Lenders have private medical and actuarial professionals review the Insured’s medical records. Sometimes, professional Lifespan Estimate Providers are tasked with preparing exhaustive medical and statistical analyses. Decisions on buying or lending are largely determined by the range of lifespan estimates from all sources.

How long the Insured will probably live is of crucial importance to Funder and Lenders. It is also one of the most sensitive of all issues that might be asked of an Insured’s attending physician. They will never volunteer their professional opinions on how long a patient might live. That is something they keep that to themselves unless asked directly by the Insured or another person with permission to ask such a question. One of the possible benefits of having a policy appraised through us is being able to inquire about lifespan findings from our third-party professionals. Once all the bids are in hand, we can usually recap the lifespan findings. As with physicians, we never volunteer this information.

Accidental Death insurance, including the temporary kind used for airline flights, cannot be sold. Regular insurance may be sold or pledged for a loan because the cause of death is unimportant, for policies in force at least 24 months.

Why the 24-month restriction? Policies to be sold or pledged for a loan must have been in force at least 24 months because of two conditions in all personal life insurance: the Contestability Period and the Suicide Exclusion Clause, both of which are in effect 24 months from the policy’s issuance. If an Insured dies within 24 months of policy issuance, carriers have the legal right to investigate the circumstances before authorizing payment of the death claim.

If the Insured were found to have made a material misstatement on the application, the carrier could deny the claim. The most common lie concerns tobacco use. Numerous HIV/AIDS policies were disqualified in the past, though since 1996 HIV has become a minor cause of death in the US. In 2014 there were 6,721 HIV deaths per the National Vital Statistics Report #65: Final Death Data for 2014. It is an incredibly detailed report of who dies of what cause.

There are two tax exemption options available for terminally ill insureds.

Historical Context:Historical Context: When the Supreme Court’s 1911 Grigsby vs Russell case concluded that a Life Insurance Policy can be sold, there was no mention of taxation. The Health Insurance Portability and Accountability Act of 1996 “HIPAA” created two tax-exempt benefits for qualified terminally ill Insureds.

Tax-Exemption Option 1:
The Viatical Settlement was created so policies could be sold without taxation. This requires physician certification of probable death within 24 or fewer months. For more information, please visit the Viatical Settlement page.

Tax-Exemption Option 2:
HIPAA also created the tax-exempt Accelerated Death Benefit (ADB). It is an optional feature added to most but not all individual life insurance policies and some group life policies. To qualify for a Claim, the Insured’s attending physician must sign a legal document agreeing with the carrier’s timeline for approval. Typically this requires certification of probable death within 6 months or less, though some carriers will accept 12 months or less. To learn more, please visit our section on the Accelerated Death Benefit.

Resources

• The Government Printing Office provides the complete text of the Health Insurance Portability and Accountability Act of 1996, of which pages 135-137 pertain to Viatical Settlements and Accelerated Death Benefits.
• The Internal Revenue Service provides the corresponding section of Internal Revenue Code on these programs: Title 26 of the U.S. Internal Revenue Code

The TCJA retroactively rescinded Revenue Ruling 2009-13. That Ruling disallowed much of each policy’s tax basis, thus increasing the chances of taxation. The short answer to Life Settlement taxation: “No gain, no pain.” If the Life Settlement is less than the premiums paid plus any cash surrender value, there has been no gain. Therefore, no taxation.

Key Points

• Life Settlements received up to the policy’s tax basis are free of income tax.
• Life Settlement received in excess of the tax basis, up to the amount of the cash surrender basis of permanent policies, are taxed at ordinary income rates.
• Life Settlements received in excess of the cash surrender value get favorable capital gains treatment.
• Since Term policies do not have cash values or cash surrender values, this means that Life Settlements in excess of the Term policy’s tax basis get favorable capital gains treatment.

Resources

Link to the  report that accompanied H.R.1, the Tax Cuts and Jobs Act of 2017:Reference pages 484-486.

Link to H.R. 1 itself, the Tax Cuts and Jobs Act of 2017. Reference Sections 13520-13521 in pages pages 96-98.

American Life Settlements recommends reviewing tax matters with a licensed accounting or legal professional.

There are three financial and legal areas Funders or Lenders may ask about.

BankruptcyIf the Policy Owner has ever been involved in any form of Bankruptcy (personal or business), a copy of the Discharge is required before the case can be underwritten and quoted. There is no time-limit. The reason for this concern: money from a Settlement or Loan could be intercepted by a Bankruptcy Trustee instead of the Policy Owner, causing distress and more legal costs.

Divorce

Divorce is the other routine legal proceeding. If the Policy Owner is going through a divorce that has not been legally settled, the Settlement or Loan would have to wait for the final Agreement. If the Policy Owner has completed a divorce, he or she might be asked to provide documents showing the policy to be free and clear, not encumbered by the Agreement. A Policy Owner attempting to sell a policy that is bound by divorce or any other legal contract could be in serious trouble, and the Funder or Lender could suffer as well.

Law suits and other legal actions

The Policy Owner may be asked to explain involvement with any other legal actions, civil or criminal.

Funders and Lenders do not require credit checks or documentation of income, assets, and employment.

Should the Insured die during Rescission, the death benefit would be paid per contract after the Settlement money was returned.  This is a consumer protection feature not found in the sale of stocks and bonds, for example.

The Rescission period allows the Policy Owner to return the Settlement funds and receive the policy back. This feature is required in many but not all states and some Funders add it to contracts even when not required. The timeline varies from 10 to 15 calendar days after the Settlement money has been received.

Also, should the Insured die during Rescission, the death benefit would be paid per contract after the Settlement money was returned.

The Rescission period is a consumer protection feature not found in the sale of stocks and bonds, for example.

Assuming the policy has been in force at least 24 months, our team will do our best to explain the one or more reasons why a policy cannot be sold now. During this conversation, we sometimes learn of additional policies, one or more of which might do well.

Generally, there are two unrelated reasons why we must decline to work on a particular policy:

Reason 1: Lifespan far beyond 20 years.

The good news is that it is a Seller’s Market and we are closing cases where the Insured’s lifespan is 20 years or even a little bit longer. However, if the Insured’s lifespan is clearly going to be much more than 20 years, and health has not changed much since the policy was issued, Funders will not be interested.

Reason 2: Non-Convertible Term, or Increasing Premium Term (Increasing Premium)

Unless the Insured is terminally ill, Funders usually avoid Term policies that cannot be converted into permanent insurance, meaning Universal Life or Whole Life. This is particularly true if the policy is Increasing Premium Term (ART) because the premium cost goes up every year. The cost-curve often goes up very rapidly and Funders cannot stand that kind of risk with non-terminal Insureds. Unfortunately, many Convertible Term policies lapse because the new premiums would be unaffordable. A lot of these policies might qualify for sale if only the Policy Owner knew about our 6 Programs.

We know from our personal and professional experience that people may become uninsurable at any moment. Insurability is a gift that usually does not come back once lost. Our first question is whether the policy is still needed. If so, our default recommendation is to keep the policy afloat and recontact us the earlier of two situations: if the Insured’s health materially declines or a year has elapsed.

However, almost everyone that contacts us wants two things: cash, and to stop paying premiums. If the policy is needed but not affordable, several other options come to mind. Is there an adult child who could afford to become Policy Owner? If not, could the face amount be decreased and kept by the present Policy Owner?

If nothing thus far will work, there is one more idea: transfer the policy to a blood relative.

As the new Policy Owner and premium payer, that person would change the beneficiary schedule. However, as we have explained in a separate FAQ, the new Policy Owner could not submit the policy for Life Settlement appraisal without the full cooperation of the Insured. That is because the Insured legally controls the case in all 6 Programs. In those situations, it is normal for the Insured to receive a portion of the Life Settlement above its cash surrender value.

Life Settlements are the most popular program because it is typically the easiest to qualify for.

No cooperation by the Insured means no Life or Viatical Settlement. This question has two answers which depend on the Insured’s competency as determined by an attending physician.

Example 1: Insured’s physician will sign a Physician’s Competency Statement.

When the Insured can easily get this Statement, the Policy Owner must secure signatures and complete cooperation from the Insured during the appraisal and funding process.

Our company has heard from Policy Owners who are divorced from Insureds, and from business owners whose insured employees are no longer with the firm. Because they own and pay for the policy, both sets of Policy Owners mistakenly believe they can do anything with the policy. This is true, except for selling the policy.

What this means is that the Insured controls the case. No cooperation by the Insured means no Life or Viatical Settlement. The Ex- and the former employee have a legal right to negotiate for some of the Life Settlement in exchange for cooperation. For policies that have cash surrender value, such private agreements stipulate that the Ex- or former employee will receive a certain percentage of the Settlement above the cash surrender value. The reasoning here is the Policy Owner could get a loan against the cash surrender value or liquidate the cash surrender value without the Insured’s signatures or cooperation.

The above also means the Ex- and the former employee has a legal right to do absolutely nothing regardless of how large a slice might have been offered.

This may seem illogical but it happens.

Example 2: The Insured’s physician refuses to sign a Physician’s Competency Statement.

In this more difficult situation, a person would need to be appointed with Durable Power of Attorney to act on the Insured’s behalf. This is a situation that we understand well through experience and has learned to approach with caution. It is much better when a terminally-ill Insured goes ahead and creates a Durable POA in advance of a Life Settlement appraisal.

Sometimes, the unexpected happens. In one instance, we had a case with an client whose side effects from cancer were negligible during his first two policy sales. When he returned to sell a third policy not one of his four attending physicians would sign the Physician’s Competency Letter….and they had evidently not shared their views with the Insured or his wife. Not wanting to breach a confidence I asked him if it would be easier for his wife to handle all the paperwork and he drafted a Durable Power of Attorney.

This was the very easy way to get this done because he was lucid and conversational.

It is far more difficult for a Durable POA to be obtained if the Insured has, in fact, become incapacitated. In that very unfortunate event, the Insured would have to be guided through the legal system in order to be declared incompetent. This is expensive, public, and embarrassing.

Funders and Lenders must be certain that the Insured is deemed of sound mind and competent by an attending physician. This helps protect the Funders and Lenders from family members or others who, after the fact, want to litigate against the Settlement or Loan transaction.Some physicians use their standard Attending Physician Statement, while others sign and date the template sent by the Funder or Lender in its closing package.

If the Insured’s Attending Physician utilizes an existing Attending Physician’s Statement, it must include the following information and be completed and signed by the Physician on the Physician’s letterhead. Otherwise, the following form must be completed and signed by the Attending Physician of the Insured. American Life Settlements can provide a form for clients if needed.

TO BE COMPLETED BY THE INSURED’S ATTENDING PHYSICIAN.

Policy Owner Name
Insured Name
Policy Number
Insurer

I,_______________, am the attending physician for _______________ and I am licensed to practice medicine in the state of _____________

It is my professional medical opinion that the above-named individual is of sound mind, competent to handle his or her business affairs, and under no constraint or undue influence.

PHYSICIAN SIGNATURE & DATE

________________________________________

Dr name
Address
Telephone
Fax

People want cash and to stop paying life insurance premiums. That was true in 1911 when the U.S. Supreme Court ruled that life insurance policies were property that could be borrowed against, used as collateral, transferred, or sold. It was just as true in 1989 when the first HIV-infected Insured’s policy was sold. All Policy Owners are free to do as they please with the money, just as if they had sold a house, car, investments or anything else. Since what Owners may do with the money is none of our business, we do not ask. Even so since 1998 we have been routinely told what specific plans were in mind.

We have heard many reasons over the years. Below is a partial list.

• Policy no longer needed or wanted
• Premiums are too high or unaffordable
• There is a need for more money now than the policy’s cash surrender value
• Policy might have to lapse
• Need cash now and retain some benefit
• Estate planning changes
• Term policy conversion deadline is near
• Terminal or chronic illness
• Health care insurance premiums and out-of-pocket expenses
• Fund Long-Term Care
• Change in personal circumstances, such as bankruptcy, divorce, or death of spouse
• Business or estate sale
• Care for special needs child or ailing adult
• Key Insured Person no longer with company
• Under-performing policy owned by a Trust
• Pay off mortgage
• Pay off debts
• Add to retirement income
• Buy investments and annuities
• Buy real estate
• Take a major vacation
• Make an Inter Vivos (living) gift of cash
• Set up college funds for grandchildren
• Make charitable donations