What Accountants Should Consider Before Becoming Trustees of Life Insurance Trusts
The CPA Journal, October 25, 2011
Ownership of life insurance policies by trusts is a frequently used estate planning technique for moving death benefits out of a decedent's taxable estate or providing beneficiaries with liquidity after a decedent passes. While accountants are often called upon to act as trustees of life insurance trusts because they are among the most trusted of all advisors, both trustees and grantors should realize that life insurance policies are sold on the basis of illustrations that are projections of longrange future performance. Read more...
A Ripe Market for Settlements
The Agent's Sales Journal, October 1, 2011
Three years ago I was asked to write about life settlements in a "down" economy -- and while I certainly never expected to be writing about the same issue three years hence, the economic downturn is not all bad for the life settlement industry. In fact, our recent recession can mean good things for financial professionals involved in bringing life insurance and life settlements to their clients. More...
Looking for a Solution for that Poorly Performing Life Policy?
The Market Has Responded with the Evolution of Life Settlements
By: Paul W. Bowen and Jon B. Mendelsohn
Responsibility and Accountability?
What are the obligations of the Trustee or Financial Advisor when making recommendations about a poorly performing or thinly funded life policy that is located in a trust? With the emergence of the life settlement market, a viable solution is now possible. The value of life insurance is an active topic among professional advisors. Many times the true-market-value of a life policy is much greater then the stated value by the insurance carrier.
The emergence of the life settlement market has significantly transformed the insurance trust business. It has presented an alternative for the trustee in making decisions regarding trusts holding life insurance policies. Exploring this option can be critical to the fiduciary responsibility of the trustee. A trustee no longer has to worry about the liability of holding a life policy that is not consistent with the objectives of the trust.
What is a Life Settlement?
A life settlement is the sale of a life insurance policy for a cash settlement in excess of the current cash surrender value. The average life settlement ranges from two to five times the surrender value. This creates tremendous economic leverage for the owner and its beneficiaries.
Case examples:
- $21,000,000.00 Universal Life Policy on a 76 year-old-female, cash value $1,375,000.00. The client received a $5,145,000.00 life settlement. The client used the proceeds to purchase a life policy.
- $10,000,000.00 Universal Life Policy on an 81-year-old male, cash surrender value was $531,458.00. The client received a $1,890,000.00 life settlement. The client used the proceeds to purchase another investment product.
- $2,000,000.00 Term Policy on a 68 year-old male, zero cash value. The client received a $250,000.00 life settlement. The client used the proceeds to purchase an annuity.
Who is Illegible and What Types of Policies Qualify?
Anyone age 65 or older, who has had a change in his or her personal life, financial situation, or health since the original issue of the policy, is illegible. All types of policies are available for appraisal: Universal, Term, Whole, Variable, Joint and Group. The face value of policies ranges from $100,000.00 to unlimited.
Changing Circumstances
A life settlement is advantageous to the policy owner and its beneficiaries when:
- Business owned key-person policy is no longer necessary because of the sale of a company, retirement, or departure from the company
- Change in estate size and owner is over insured for estate-tax purposes
- Need for liquidity
- The purpose of the policy was to protect a young family and it is no longer needed
- Premiums have become a burden and they are no longer economically feasible.
- The policy is no longer consistent with the purpose of the trust
Circumstances change constantly in the lives of a family. The trustee searches for solutions that will not only solve current issues, but also position the family for the future. A trustee must ask the question "Is the life policy consistent with the objectives of the trust?" If the answer is no, it is a trustee's duty and responsibility to explore alternative options for its client. Once it has been determined the life policy is not meeting the expectations, for any of the above reasons, it is a trustee's obligation to
explore the life settlement option.
The trustee can anticipate the policy appraisal to be completed in six weeks. The valuation will conclude one of two options. It may establish that the best interest of the trust is to maintain the current policy. It may also be determined that the immediate sale of the policy is in the best interests of the trust. The proceeds can then be placed in a product better suited to the objectives of the trust.
Who Becomes the Policy Owner?
Since the entrance of sophisticated capital into the Life Settlement market, there have been over two-dozen Providers purchasing policies. Provider companies are backed by institutions such as banks, reinsurance companies, and private entities, such as pension and IRA rollovers. Each Provider has qualifications or parameters they look for in reviewing a policy. If the policy does not fall within their parameters, the policy is simply declined. What is a trustee to do then? Start the process over with another Provider? This could become quite cumbersome.
Another important issue a trustee must consider is that a Provider is representing investors. It is in the Providers best interest to purchase the policy for the lowest amount possible. Working with a Provider directly places the owner in a captive situation, not unlike the cash-surrender-value from the insurance carrier. How can a client be assured they are receiving the fair-market value?
Wholesalers and Brokerage Groups
Wholesalers and Brokerage companies are an alternative to a Provider company. These companies do not raise capital or report to investors. They report solely to the advisor and trustee. They work only with licensed Providers to ensure that the financial advisors do not jeopardize their licenses. The process is simplified by having one point of contact and one application, which will cover the entire market. This creates competition between the Provider companies, resulting in a higher offer for the client.
Incorporating Life Settlements into Your Practice
Providing a comprehensive financial plan for your clients is the key objective. This specialty product will serve as a tool to maintain the current assets of your clients' estate, and create additional liquidity under the financial advisors umbrella. Many financial professionals feel it is the fiduciary responsibility of the trustee and professional advisors to strategically align themselves with a life settlement company. A life settlement can provide the policy owner tremendous economic leverage. Because the appraisal process is free and non-binding, there is not a downside for the client. In fact in this volatile economy, a policy appraisal can be viewed as a proactive strategy in marketing financial services. The completed transaction can serve as a springboard to purchase additional products or fulfill lifelong dreams. Regardless of the appraisal value of the policy, the policy owner will benefit from the true assessment of an unrealized asset.
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This month I wanted to answer some of the more common questions advisors ask us with regards to life settlements:
