Senior Life Settlements Are A Valuable Planning Tool

A Legitimate Financial Planning Tool For Practicioners

As financial planning professionals, it is our responsibility to introduce our clients to all applicable tools into the planning process. The use of life settlements is a tool that has been often maligned and overlooked. Quite simply, a life settlement is the sale of an existing life insurance policy to a third party.

As the spread of AIDS occurred, an industry emerged in which viatical brokers would purchase the policies for as little as possible and then sell them to funders. These funders were primarily private individuals, aligned with finance companies or insurance brokerage firms. While viatical settlements were beneficial to thousands of AIDS patients, the development of new treatments for HIV and AIDS made it difficult to estimate the death of the policyholder and viaticals lost favor with both policyholders and funders.

In 1993, the National Association of Insurance Commissioners (NAIC) developed a model to provide standards and guidelines for the next concept - life settlements. A.M. Best Co. issued its first ratings on securities collateralized by life settlements in January 2004.

The Census Bureau estimates that there will be 50 million people 65 and older by 2010 (15% of the population). The potential life settlement market could reach $100 billion, according to a 2002 Wharton School of Business study.

Policies that were purchased to protect a young family in the case of the premature death of the insured or to fund college educations may no longer be appropriate as a client matures. Clients may divorce and remarry and change their estates accordingly. Clients may even outlive the beneficiaries of their life insurance. These policies, with escalating premiums, can become a financial burden on the client or be an inappropriate use of their money.

Business Succession

Businesses have changing needs for life insurance the insured leaves the company or retires, the company changes ownership, or the company can no longer afford the premiums. Taking advantage of key person insurance that has been purchased on an executive who is no longer going to stay with the company is a unique opportunity for a life settlement.

Long-Term Care Protection Without some form of coverage, the client could deplete most or all assets on the cost of long-term care, which averages $74,095 a year in the United States. In addition, the costs of care are escalating at an average of 5% compounded per year. A life settlement can provide the money needed to purchase a long-term care insurance coverage. The U.S. government's Medicare Website (www.medicare.gov.) expressly stipulates that the use of life settlements is an opportunity to fund long-term care. It offers a concise overview of requirements and limits for consumers and financial planners alike.

Charitable Giving

The non-profit sector is a major beneficiary of life insurance policies among wealthy insureds. Policies were traditionally donated to the charity with the premiums paid by the organization. However, many donated policies have been lapsed because the organization cannot afford to continue paying the premium. If the donor agrees, the policy can be sold, thus generating immediate revenue for the organization.

Profile of a Life settlement Client

Those with serious health issues and a shorter life expectancy will receive a higher settlement offers. The lower the cost to the purchaser to carry the policy and the more imminent the payment, the higher the negotiated settlement amount is likely to be.

Life settlements and Taxation

Life settlements have three areas of taxation consideration. First, total premiums paid by the policy owner are non-taxable and are the owner's cost basis. If the cash-surrender value is greater than the total premium paid, the difference is treated as ordinary income. Settlement proceeds that are in excess of cash-surrender value may be treated as long-term capital gains.

As financial planning professionals, it is our responsibility to make sure that this solution is considered and explored to determine if it is in the best interest of our clients.

P & T Financial has expertise in senior life settlements in California, including San Diego, Irvine, Santa Ana, Long Beach, Riverside, Los Angeles, Santa Barbara,Bakersfield, Fresno, Modesto, Sacramento, Stockton, San Francisco, San Jose, Oakland and Redding, Anaheim, Chula Vista, Fremont, Irvine, Glendale, San Bernardino, Huntington Beach, Oxnard, Fontane, Moreno Valley, Oceanside, Rancho Cucamonga, Santa Clarita, Garden Grove, Ontario, Pomona, Santa Rosa, Salinas, Palmdale, Hayward, Pasadena, Torrance, Corona, Lancaster, Escondido, Orange, Elk Grove, Sunnyvale, Fullerton, Thousand Oaks, El Monte, Simi Valley, Concord, Visalia, Vallejo, Inglewood and Santa Clara geographic markets.