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Life Settlements: An Undiscovered Asset
10/10/2007 12:00 am EST
Panelists Louis P. Stanasolovich of Legend Financial Advisors, Inc., Kurt Gillhaus of Life Settlement Solutions, Inc., and Jeff Wyatt of Advanced Settlements, LLC, discussed how financial advisors can use life settlements to help their clients maximize their unneeded, underperforming, or unwanted life insurance policies.
Life settlements are insurance policies held by seniors-a man or woman, age 65 or older. A life settlement is generally defined as the purchase of a life insurance policy for a lump sum that is greater than the policy's cash surrender value, but less than its face value (death benefit).
The average life settlement client receives three-to-six times their cash surrender value if cashed in through their insurance companies-a point that may be of great benefit to many clients. Life settlements work best for people whose life expectancy is 12 to 14 years.
For the client, life settlements can satisfy many needs, as the proceeds of the sale can be
used in any way and are often utilized to fund other financial products. In fact, 70% of all life settlements sold are used to purchase new products such as annuities, long-term care, and other life insurance.
Several other situations in which clients should consider a life settlement include:
- The insured has outlived his or her beneficiaries
- The insured cannot afford the policy's premiums
- The insured's health status has changed since the policy's inception
- The insured is retiring or selling a company
- The policy owner plans to surrender a policy or let it lapse
- The insured wishes to give to charity while he or she is still living
Life settlements also may have some business applications, such as paying off company debt or funding deferred compensation and severance packages.
The panelists noted the prevailing trend in the life settlements industry is toward securitization, similar to CMOs and structured notes, and coming soon are derivatives and options. Market issuance of life settlement asset-based bonds totaled an estimated $23 billion by year-end 2005, up from $13 billion in 2004, according to Sanford C. Bernstein.
With our aging demographics, life settlements can help advisors retain and expand their client base.
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