the repercussions of selling a policy include higher premiums on future
insurance purchases, the inability to buy additional coverage, and a certain
loss of privacy, since the investor will have access to your health records.
guide doesn’t go into detail as to why an investor might be
willing to pay more than the policy’s cash surrender value.
What policies qualify for sale?
Life settlement investors want to purchase policies on insured
individuals who have a serious deterioration in health, low
premiums, and large face amounts. The value of a policy to an
investor is the present value of future benefits less the present
value of future expenses, which include premiums, compensation, taxes, administrative costs, and profit margin. When this
value is larger than the policy’s cash surrender value, the policyholder might wish to sell. In general, whole life policies have
too high a cash surrender value to generate additional value
upon settlement. In addition, secondary guarantee universal life
policies have high required premiums, reducing the value to an
investor. Large policies are favored because they keep per-unit
administrative costs down.
the investors, who must determine if the purchase of this policy fits their portfolio needs.
(Sometimes the LSP is empowered to make this
determination for the investor, sometimes not.)
The policyowner should have several bids
from which to choose. Once he or she makes a choice, the process gets particularly complex. While the policyowner and
insured had to sign a number of forms for the initial underwriting process, there are many more forms (perhaps 50 or so) that
will need to be signed before the settlement/sale is finalized.
The core of these documents includes the policyowner’s durable power of attorney in favor of the buyer, beneficiary consent
forms, spousal release forms, change of ownership and beneficiary forms, the policy purchase agreement itself, and Health
Insurance Portability and Accountability Act (HIPAA) waivers.
Proceeds of the sale are held in escrow until the change of ownership is finalized. The Academy guide suggests that the owner
of the policy also seek legal advice for this sale.
Who are the parties to the agreement?
There are five main parties—the insured individu
policyowner, the agent, the life settlement provider,
the investor. But many more people get involved in t
transaction along the way.
The policyowner should be represented by lega
and tax advisers. The life insurance company will
provide illustrations and policy change forms. There
should be multiple life settlement providers bidding
on the policy. Physicians for the insured individual
provide the attending physician’s statement(s) so
that the life settlement providers can evaluate the
risk. Each provider may use its own underwriter for
this, and each provider also may submit the policy to
multiple investors, who may employ any number of
consultants to evaluate the risk.
the
d
how complicated is this process?
The process is even more complicated than you might
imagine. First, the policyholder talks to his or her adviser (usually a licensed insurance agent) and tells the
adviser that he or she wants to sell the policy. The adviser then sends basic information, such as policy size,
age, and health of the insured, to several life settlement
providers to determine their interest. The adviser
also starts collecting policy illustrations and medical
records from each of the insured’s physicians so that
the life settlement providers can underwrite the case.
Because life settlement providers generally aren’t
the investor, underwriting information often is sent to
Your MoneY
or Your Life
Because so much of longevity is genetical- ly predetermined, it’s
often said that if you want to
live a long life, you need to
pick your ancestors.
After reading Haeworth
robertson’s fast-paced novella The Silver Pendant, you
may find yourself thinking
that the better key to longevity is to pick your heirs.
in the novella, Alan
Jameson, whom robertson
paints as tall, athletic, well-spoken, and a clear leader,
is working as an assistant
actuary at a life insurance
company when he begins to
pick up on a pattern of excessive mortality among the
company’s insureds. All had
