Producer Equity Positions

By: C. Daniel Hughes, LUTCF, CEP

The Tool You’ve Been Looking For To Set You Apart From The Others

As estate planning professionals, we are on the verge of a major breakthrough in using life insurance to create enhanced financial flexibility for our clients. Changes in people’s lives can easily alter, reduce, or even eliminate their need for currently owned life insurance. What was once a sound and essential asset can often turn into an unneeded expense or even a burdensome liability. People typically had few choices when faced with these issues. They can continue to pay for an unneeded policy, they can surrender the policy for the cash surrender value (if one existed), or they could let the policy lapse, thus losing any money previously invested in the policy. Today policyholders and their advisors have a powerful new option and Lifetime Settlements are proving to be a viable and effective alternative.

A new market-making function has emerged among some blue-chip investment firms. These “market-makers” enable policyholders to sell their life insurance policy to a secondary market of funders willing to assume the at-risk portion, or the death benefit in excess of the policy’s cash value. In a Lifetime Settlement transaction, these “market-makers” are essentially converting an existing life insurance policy from a contingent asset dependent solely upon the death of the insured, to a liquid asset having an economic value prior to death. This may be the most significant innovation to impact the life insurance industry since the advent of the universal life policy. Its affect among estate planning professionals may prove to be equally significant. Using a Lifetime Settlement, policyholders can now proactively plan and use their policy as a new source of capital.

The following examples help illustrate the power of Lifetime Settlements and how they can create economic value where none previously existed.

Example 1: Male, age 75, and majority shareholder of a privately help corporation. The company owned a $25 million key man insurance policy on his life. Following major heart surgery, the man decided to sell his equity interest and retire. Since the succeeding owners had no interest in maintaining the policy, the policy cash surrender value of $3.5 million was calculated in the man’s sales price. Unfortunately, the man felt the overall price was not enough. A life settlement was presented as an alternative to enable a funding source to purchase the policy for a lump-sum settlement. The man received $14 million, $10.5 million over the policy surrender value. This newly found capital helped to facilitate the sale of his majority interest. In addition, he was able to fund accelerated gifts to his children and into trust.

Example 2: Male, age 68 and good health, owns a 10-year level term policy for $500,000 and the policy premiums are scheduled to significantly increase at the end of the policy year. Since there is no cash value, the man had originally decided to let the policy lapse. He was presented a Lifetime Settlement through his attorney and decided to have his policy appraised. He was offered $25,000.

The process is simple. A policy is presented, evaluated, and appraised taking into account issues such as age and health of the insured, along with the economics of their policy. The client is subsequently presented with a lump sum offer for their policy, should they qualify. The Lifetime Settlement Company becomes the new owner and beneficiary of the policy and pays all future premiums eliminating any future premium obligation by the insured. It’s a win-win situation. First and foremost, the client benefits. With this newly found liquidity, they will be in a better position to pursue other financial and estate planning goals.

While fairly new, Lifetime Settlements are likely to become a mainstream financial planning tool for individuals over 65 and their corporations or trusts. Be prepared to present this powerful tool to your clients. You will likely be showing them something they have never seen before and will clearly set you apart from your competition.

C. Daniel Hughes, LUTCF, CEP is a Certified Estate Planner and Sales Manager with Commonwealth Insurance Financial Services in Newport News, Virginia and can be reached for questions or comments at 888-595-6815.