Life Settlements: a New Option for Excess Life Insurance

• Publication year: 2002
• Pages: 99
• Citation: Vol. 31 No. 10 Pg. 99

31 Colo.Law. 99 Colorado Lawyer 2002.

2002, October, Pg. 99. Life Settlements: A New Option For Excess Life Insurance

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99

Vol. 31, No. 10, Pg. 99

The Colorado Lawyer
October 2002
Vol. 31, No. 10 [Page 99]

Specialty Law Columns
Estate and Trust Forum
Life Settlements: A New Option For Excess Life Insurance
by Morton P. Greenberg, C. Andrew Graham

This column is sponsored by the CBA Trust and Estate Law Section. The column focuses on trusts and estate law topics including estate and trust planning and administration, elder law, probate litigation, guardianships and conservatorships and tax planning

Column Editor:

David W. Kirch, a sole practitioner in Aurora - (303) 671-7726

About TheAuthors:

This month's article was written by Morton P. Greenberg, Parker, an attorney and life settlement broker who nationally represents purchasers funded by financial institutions - (303) 841-0891, mpgjd@aol.com; and C. Andrew Graham, Denver, an attorney and owner of Graham Financial Partners LLC, a Denver-based financial services firm specializing in wealth transfer and insurance planning - (303) 765-5700, candrew@grahamfin.com.

The option of selling unneeded life insurance policies is beginning to have a major impact on estate, financial, and insurance planning strategies. A life settlement can tap

hidden value that may exist in a life insurance policy. This article provides a brief overview and examples of this technique.

The owner of a life insurance policy who no longer wanted to retain the contract traditionally had only two options: lapse or surrender of the policy. When a term or permanent insurance policy lapses, the policy owner receives nothing. If a permanent insurance contract is surrendered, the net cash value is paid to the policy owner.

Attorneys should consider a new potential alternative for their policy owner clients: a "life settlement" - sometimes referred to as a "senior settlement" or a "viatical settlement." This new development has become a niche in the insurance marketplace over the last several years. Policies sold in a life settlement transaction always will enrich their owners with funds substantially greater than the amount that would be received by surrendering the policy to the carrier.

This article provides an overview of life settlements and examines issues such as divorce, business sales, and tax ramifications of life settlements. The article includes a number of examples to clarify the use of life settlements in both business and estate planning contexts.

Overview of Life
Settlements

The secondary market for life insurance policies is interested primarily in contracts covering insureds who are in their mid- to late sixties or older and who are deemed to have the life expectancy of someone in this age category based on health conditions. Any policy insuring a person with a fourteen-year or less life expectancy that is no longer needed or wanted is a potential candidate for acquisition. Advisors should be aware of this alternative and apprise their clients of the potential hidden value of a policy before it is surrendered.

The most desirable contract insures someone who has had a negative change in health since the policy was purchased. Entities interested in acquiring such contracts usually want policies in amounts of $250,000 or more. These purchasers typically are willing to buy any type of policy, provided that the policy is beyond its contestable period. Unlike casualty insurance, an insurable interest in life insurance only needs to exist at the time the initial policy was purchased - not when the claim is paid. The most commonly purchased life insurance contracts are convertible term contracts and universal life policies insuring one insured.

It may be difficult to understand why an insured would ever sell a life insurance policy after experiencing deterioration in health. This would seem to be the time when the insured and his or her advisors acknowledge that their earlier

decision to buy life insurance was well founded. To analyze this reasoning a little closer, assume that a husband and wife are reviewing their estate planning for the second or third time. Also assume that earlier planning encompassed insurance on the husband's life that is owned by an irrevocable life insurance trust ("ILIT").

The couple is now older and wealthier and believes that survivorship insurance (a life insurance policy that pays at the second death) would be more cost-efficient. With survivorship insurance, as long as one of the two lives is healthy, the policy usually can be purchased for less premium outlay than for a contract insuring only a single, healthy life. When a client is rated or uninsurable, chances are that the existing life insurance policy is a salable asset.

State Law and Life
Settlements

Colorado does not regulate or license individuals or life settlement companies that participate in life settlement of viatical transactions. Currently, thirty-six states have laws that regulate viatical settlements, but only seventeen extend those laws to include life...