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Life Settlements with NO Medical Underwriting

By Roccy M. DeFrancesco, JD, CWPP™, CAPP™ - Email Editor

Date : May 12, 2009

Dear Valued Reader,

To say that the life settlement (LS) market has gone through some changes over the last 12 months would be an understatement. Only a little while ago, there were buyers standing in line to buy polices for amounts up to 30% of face (the death benefit of the policy). Now the line is a lot shorter, and many firms have figured out that the life expectancy (LE) reports from policies previously purchased may have been a bit optimistic (meaning that the LE is actually a bit longer than the buyers calculated).

LSs are not the easiest sale

Traditional LSs take a lot of work and time to close. That’s one reason many advisors shy away from them. Traditional LSs have medical underwriting, and the process takes 6-8 weeks to even find out if a “good” offer is going to be given to clients.

Life Settlements with NO medicals and No Life Expectancy

If I asked you what would be the perfect LS situation, it would be one where there is no medical underwriting. Well, guess what…such a program recently came into the marketplace.

Now those looking to sell their life insurance policies can know for certain that they can obtain a financial offer. With a traditional LS, again, you have to go into underwriting and maybe an offer will come and maybe not.

What kind of policies can be sold through this no-underwriting program?

Both non-convertible, yet renewable, and convertible policies; the non-convertible, renewable policies must renew to age 90 with five years remaining on the level term period. It really is just that simple.

How can buyers justify buying policies with no underwriting?

This also has a fairly simple answer; buyers are not paying as much as they would for policies that are medically underwritten. Having said that, sellers will get less than if they were not healthy and sold them in a medically underwritten LS situation. We are talking about term policies that, for many, will simply expire, which will leave the insured with nothing. The saying is that 4-7% of something is better than 0% of nothing.

Examples:

1) Male, age 74, 15-year term with CNA and 2M face that was issued in 2000. The policy was out-of-conversion period. The policy sold for 60k or 4%. The client used the 60K to help purchase a 500K UL that had a premium of 16K.

2) Male, age 71, purchased a 10-year term 9 years ago for 1M face amount. The policy was converted and the premium was 52K. The policy was converted to a Universal Life policy for 72K or 7.2%. Then the client purchased a new 10-year term policy with 500K of face for 6K annual premium.

In both examples, 99.9% of the people who own such policies if they do not die will simply let them lapse. A LS as outlined above was a tremendous benefit to the client.

This program may not last long

This non-medical underwriting program may not last long. It is a unique program brought forth through a certain broker who has a certain amount of institutional investors and pension funds that are buying the policy. There is no guarantee that once the capacity of these investors is used up that other buyers will step into their place.

That means if you are interested in selling your term life policy (or if you have an older loved one or friend who may be a candidate), you should act now to learn more.

IRS issues two LS Rev. Rulings

The IRS has issued two RRs on the taxation of life insurance policies that are sold in the LS market. Most non-advisors are not aware of how gains from the sale of a life insurance policy work, and these two notices clarify the taxation. If you would like a PDF of the two IRS rulings send us an email request.

If you or a loved one have a policy and want to know what you could sell it for, please contact info@trustmakers.com.

Until next week,

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