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Life settlements provide producers with a very new way to help older life insurance clients make strategic use of their life policies.
Even so, some marketers confuse life settlements with viatical settlements. It is true that both types of transactions entail the purchase of an existing life policy, with the proceeds of the sale going to the policy owner. However, the two transactions differ in critically important ways.
Here are some facts to help clear the airand also to help you decide when to consider the life settlement option for your clients.
First and foremost, a life settlement is different from a viatical settlement.
The life settlement is a sophisticated financial planning tool for older affluent individuals. It is generally for insureds over age 65, with a life expectancy of 13 years or less, who have had a change in health but are not terminally ill.
The face amounts of the life policies used in these agreements tend to be large. (At our firm, they average $1.1 million, with many going over $10 million.) Currently, seven institutional buyers finance life settlements.
A viatical settlement, on the other hand, is purchased when the insured has a life expectancy of generally two years or less (specific regulations vary by state).
Typically, viatical settlement transactions are on the small side, generally involving face amounts of $50,000 or so. A viatical settlement often relies on an individual investor for financing, and often times the investor knows the identity of the insured and the policy owner.
Here are some other life settlements pointers:
1) A life settlement is not considered a security, according to most states "blue sky" security opinions.
In these opinions, there is a distinction between the "front end" and the "back end" of a settlement.
It goes this way: If a policy owner sells a policy to a licensed settlement provider and the transaction has been consummated in accordance with the states viatical and life settlement laws and regulations (the "front end"), the client and his insurance advisor have not participated in a transaction regulated as a security.
If, however, an insurance advisor is raising funds for financing entities or reselling purchased policies to individual investors (the "back end") this, according to most states, would constitute a security.
