Senior Settlements

Whether you call it a Senior Settlement, Lifetime Settlement, or High Net Worth Transaction – Life Settlements have become a very important factor in the estate planning process for seniors. Prior to the Life Settlement Industry, if a senior owned a policy that was no longer wanted, needed or affordable, there was no option but to lapse, cancel, or surrender the policy back to the carrier for the cash surrender value. Life settlements allow qualified policy owners to liquidate a policy for an amount much higher than the cash surrender value. Then, these seniors can take advantage of important financial opportunities using the proceeds of an unwanted, unaffordable or obsolete life insurance policy.

Today, with the advancement of Life Settlements as a mainstream financial product, Life Insurance Companies now face competition for the surrendered policies that they once monopolized. The Life Settlement Industry has created a competitive secondary market for life insurance policies. Consumers are now in the driver's seat, free to sell their policies in an open market for the highest available price, well above the cash surrender value offered by insurance companies.

Benefits to Policy Owners

• Relief of monthly premium expenses
• Additional funds to supplement retirement income
• Higher cash payout than the cash surrender value
• Funds to seek treatments not covered by health insurance
• Generate profit from a non–performing & often worthless asset
• Alternative funding for LTC policies, annuities or other investments

Benefits to policy owners

• Relief of monthly premium expenses
• Higher cash payout than the cash surrender value
• Additional funds to supplement retirement income
• Funds to seek treatments not covered by health insurance
• Generate profit from a nonperforming & often worthless asset
• Alternative funding for LTC policies, annuities or other investments

Senior Settlement Process

The process generally takes between 4 – 6 weeks from submission of the application to presentation of offers.

The Transaction Process – Step By Step

1. Complete the preliminary Application, Disclosure and Authorization Forms and provide HBW with all necessary documentation.
2. When these forms and documents have been received, our work begins.
3. HBW's staff will immediately review your application, making sure all documents have been completed properly. Please remember to submit a copy of the life insurance policy.
4. Next, your life insurance and medical status are verified by acquiring all of the necessary documentation from your insurance company as well as your doctor.
5. Once the proper information is verified, your case file is then reviewed by an insurance specialist and professional medical expert.
6. Based upon these reviews, your file is evaluated and negotiations begin with our multiple funding sources.
7. We will negotiate the absolute highest settlement amount available for your policy. Please review our negotiation process for more detailed information.
8. We then relay the highest offer to the applicant and he/she decides whether or not to sell the policy.
9. If the offer is accepted, legal closing documentation is drafted and overnighted to the seller (applicant), which includes: a purchase and sale agreement, life insurance policy change forms, beneficiary waivers, etc. These documents must be signed, witnessed and notarized in order for the transaction to be completed.
10. Upon the return of these closing documents, the policy change forms are then submitted to your life insurance company to transfer the rights of the policy to the purchaser.
11. Payment to the seller is completed via bank check or wire, within 24–72 hours following the verification of the life insurance policy transfer of ownership and beneficiary rights in the policy. Please note that this time period may differ by state, depending on existing state law and provider agreement in non–regulated states.
12. Rescission Period: Seller has the right to change their mind for 15 calendar days (30 days in some states) from the date funds were received. Details of the rescission period will be included in the Life Settlement Purchase & Sale Agreement.

Key Factors

1. Completed application. Our application must be completed in full. It is also required that the policy owner and insured complete our Release of Information Form. This form allows us to contact doctors and insurance companies to request the necessary documentation required to determine qualification status. Please also remember to submit a copy of the life insurance policy.
2. Acquisition of medical records. This can cause considerable delays. If we are provided with a complete medical file (most recent 4 years of records), the process can be completed very quickly. Otherwise, we must request this information from the insured's doctors, which can take 2 – 3 weeks on average.
3. Verification of life insurance policy. The insurance company must complete our verification of coverage form. This usually takes between 7 – 30 business days.
4. Availability of applicant. This process can be delayed if we cannot contact the applicant in a timely manner. This is very seldom a problem for those who are motivated to learn their qualification status and available offers.

The qualifications for a life settlement transaction differ from purchaser to purchaser in much the same way as the underwriting criteria for life insurance companies. Table ratings can differ from carrier to carrier and so can a life expectancy in this business.

In order to save valuable time for the policy owners and their agents, Mountain Financial underwrites each case in–house and also obtains an independent life expectancy review. Once this process is completed, the life expectancy and insurance parameters are matched to the various requirements of our multiple funding sources. By working with every funder, Mountain Financial has the ability to match each case to the best funding sources and ensure that all of our clients receive the highest possible settlements.

Below are summaries of the industry's standards of qualification for a Life Settlement and a Life Expectancy Chart to provide an estimate of projected mortality for an insured.

Senior Settlement Qualification Guidelines

1. Life Insurance

• Policy must be at least 2 years old – only non–contestable life insurance policies are considered.
• Life Insurance Carrier must be rated B+ or better.
• Minimum face value of $100,000 – NO Maximum. Lower face values considered if insured has shortened life expectancy.
• All types of policies qualify, including term, whole life, universal life, joint–survivorship, group, corporate–owned policies (COLI), key–man, and life policies held in irrevocable life insurance
• Policy Owner may be the insured, a company, a family member, a charity or any other entity with an insurable interest in the life of the insured.
• Yearly premiums should generally be under 5% of the policy's face value.

2. Insured's Health Status

• Seniors with limited life expectancies of under 12 years may qualify.
• There must be a change in health or in table rating since the policy was issued.
• The general target age is 75 and above.
• Please do not believe some ill–informed agents or brokers, healthy seniors do not qualify. Some type of health issues that limit the insured's life expectancy must be present.
• Copies of medical records are obtained for verification of health status.
• NO MEDICAL EXAMS ARE REQUIRED!

Detailed Explanation of Health Guidelines

Health qualifications for a life settlement are based upon the insured's life expectancy estimates. Life expectancy is determined by independent reviews of the insured's medical records by third party medical underwriters. The underwriters provide individual life expectancy opinions based upon statistical data combined with the insured's medical history. These estimations can vary significantly due to differing opinions on treatments, prognosis and future medical advances. Due to these factors, variances in offers made by Life Settlement Funders is very common.

1. Please review the chart below for life expectancy estimations.
2. This chart is for informational purposes only and is provided to give an understanding of insured's health and life expectancy estimates that are required for qualification for a Life Settlement.
3. The highlighted ages may qualify based upon health status.

Senior Settlements Frequently Asked Questions

What are life settlements?

A life settlement is the sale of a life insurance policy or certificate (hereafter referred to as policy) issued on the life of a person, who does not have a catastrophic or life threatening illness or condition that is likely to result in death within 24 months, for a dollar amount that is less than the policy's face value. The person who is insured under the policy is called a life settlor. This person may or may not be the owner of the policy. Only the owner of the policy has the right to sell the policy. If you do not own the policy, the owner cannot sell the policy without your consent. The entity that buys the policy is called a life settlement provider (hereafter referred to as provider), additionally, there are persons called brokers or provider representatives, who help with the sale of the policy. A life settlement offers you the opportunity to receive a portion of your policy's death benefit while you are still alive.

How do life settlements work?

Most providers, provider representatives, or brokers will ask you to complete an application and medical release forms so that they can gather information from your life insurance company and your doctors. All information gathered must be kept confidential and cannot be given to anyone without your written approval. If you qualify, the provider will make you an offer for your policy. The amount offered for your policy will be based on facts such as how long you are expected to live, the amount you pay for premiums, the rating of your insurance company, and your policy’s provisions (e.g., a waiver of premium). If you accept the offer, you will be asked to sign a life settlement contract.

Do I have to sell all of my policy?

No. You can sell all of your policy or you can sell only a part of your policy. If you sell only a part, you will be required to assign or transfer only the part being sold. If you sell the entire policy, the provider will become the new owner of the policy.

Is there a difference between a broker and a provider representative?

Yes. Although both a broker and a provider representative will help you with the sale of your policy, there are important differences between them. A broker works for you. A broker will check with several providers to find the best offer for you. A provider representative works for a provider. A provider representative will only check with the provider that he or she works with to get you their offer. If you use someone to help with the sale of your policy, you may want to ask whether they are a broker or a provider representative.

Is the provider, provider representative, or broker required to keep my information confidential?

Yes, any financial, medical, or personal information obtained by a provider, provider representative, or broker about you, including your family members, a spouse, or a significant other, may not be shared with anyone unless you have given written approval that the information may be shared. Any written approval for the sharing of this information must show who may get the information and why it will be released.

If I enter a life settlement contract, when will I get my money and from whom?

The answer to this question depends on how the provider runs its business. Some providers use an escrow agent or trustee to handle the money that will be paid to you. The escrow agent or trustee will send you the money within three business days of the date the insurance company confirms to the provider that the transfer of ownership has been completed.

What if I change my mind?

If you change your mind about selling your policy, you can cancel the life settlement contract at any time up to the 15th day (30 days in some states) after you receive the money from the provider. If you change your mind, remember to arrange with the provider to have the insurance company transfer the ownership of the policy back to you. The guidelines for the rescission period will be explained in detail in the Life Settlement Purchase & Sale Agreement, which can vary on a state by state basis.

What if I die shortly after selling my policy?

If you die at any time up to the 15th day (30 days in some states) after you receive the money from the provider, the settlement contract will automatically cancel. The provider will pay the owner of your policy or beneficiaries designated by the owner in the life settlement contract any proceeds it receives from your policy, minus any money it already paid for the purchase of your policy and any premiums it paid to the insurance company to keep your policy current. The insurance company or the provider should refund any unearned premiums paid.

What happens after I get my money?

After the provider has paid the owner for the sale of the policy, they may begin calling to check on the health status of the insured.

What if I don't want to be contacted about my health status?

If you do not want to be contacted about your health status, you may appoint an adult person or persons to be contacted on your behalf. That person must be in regular contact with you and you must give the provider their name, address and phone number. Once you give the provider this information, they may not contact you unless they have tried and have not been able to reach your contact person for more than 30 days. If you need to, you can change your contact person at any time by sending a written notice to the provider.

How will I know who will be calling me or my contact person about my health status and how often can they call?

The provider must give you the name, address, and phone number of the person who will be contacting you or your contact person(s) about your health status. If your life is expected to end in one year or less, contacts to check on your health status are limited to once every 30 days. If you are expected to live for more than one year, contact is limited to once every three months.

Will the provider be calling my doctor to check on my health status?

Some providers will use your signed medical release form to check with your doctor for updates on your health status. The medical release form tells your doctor that you want your doctor to give your medical information to the provider, their broker, or provider representative. If you decide you do not want the provider to contact your doctor, you have the right to withdraw your medical consent in accordance with law.

How will I know if my policy includes extra coverages like accidental death, future increases in the death benefit, or covers other family members? Do these affect my settlement?

Some policies contain extra coverages. You may want to contact your insurance company or agent to see if your policy contains a provision or rider providing extra coverages. If your policy includes a benefit for accidental death, the additional death benefit may not be included as part of your settlement. The additional death benefit may remain payable to your beneficiaries or your estate. If your policy provides future increases in the death benefit, you may want to ask how much the provider is paying you for the purchase of this benefit. If your policy is a joint policy, or provides coverage on the lives of other family members or anyone other than yourself, there may be a possible loss of coverage.

Are there other options available besides selling my policy?

Your insurance company may offer options, such as accelerated death benefits, loans, and surrender of the policy for its cash value. Before entering into a life settlement, you should contact your insurance company or agent to see what options are available.

What other things should I know about a life settlement contract?

Some things that may be affected if you enter a life settlement are:

• There may be a loss of life insurance coverage on your spouse or other family members, if the policy (or any riders attached to it) covers their lives;
• The amount of premiums you pay;
• Policy cash values or dividends, if provided for in the policy;
• A loss of other rights or benefits, including conversion rights and waiver of premium benefits that may exist under the your policy;
• You may incur tax consequences;
• Your ability to receive supplemental social security income, public assistance, and public medical services including Medicaid;
• The money you receive for your life settlement could be taken away from you by creditors, personal representatives, trustees in bankruptcy, and receivers in state or federal court.

Because of the above, you should contact an attorney, accountant, estate planner, financial planning advisor, tax advisor, social services agency, your insurance company, or agent, as applicable, to find out what effect selling your policy will have on you.

Potential Tax Implications of a Life Settlement

The taxation for a life settlement transaction can be very complicated. We will attempt to provide a general guideline that has been used in past transactions, however we cannot stress enough that each case can be treated differently by the IRS. Professional tax advice should be sought.

Quick Definitions

• CSV = Cash Surrender Value
• Cost Basis = Total dollar amount of premiums paid into the policy
• Settlement Amount = Purchase price paid to policy owner/seller for the sale of the policy

1. If there is no CSV or if the CSV is lower than the cost basis in the policy, then the taxable income is the dollar difference between the settlement amount minus the cost basis of the policy. That amount is treated as a capital gain.
   
   Capital Gains Tax = Settlement Amount – Cost Basis
2. If the CSV is higher than the cost basis, then that difference is treated as ordinary income and taxed according to the policy owners tax bracket. Then the difference between the settlement amount and the CSV is treated as a capital gain.
   
   Ordinary Income Tax = CSV – Cost Basis
   Capital Gains Tax = Settlement Amount – CSV
3. If the cost basis in the policy is actually higher than the settlement amount, then there should not be any taxable income from the transaction.
   
   No Taxable Income = Settlement Amount – Cost Basis = ( – ) Negative Value (Loss)

Please remember that these are general guidelines and cannot be relied upon as fact. The tax implications of a settlement should be considered prior to the transaction.

Mountain Financial strongly recommends that a policy owner seek professional tax advice prior to accepting any offers.

Additional Affects

Receipt of payment under a life settlement may affect your eligibility for public assistance programs, such as medical assistance (Medicaid), aid to families with dependent children, supplementary social security income, and AIDS drug assistance programs; and it also may be taxable and subject to claims of your creditors. Before applying for a life settlement, you should consult with the appropriate social services agency concerning how receipt could affect your eligibility and that of your spouse or dependents; and because of the potential tax consequences, please consult with a tax advisor.

Entering into a life settlement contract may cause other rights or benefits such as disability waiver of premium benefits that may exist to be forfeited by the owner; assistance should be sought from a financial advisor before pursuing and completing this transaction.

Senior Settlement Case Studies

Our broker has negotiated millions of dollars in life settlement proceeds for senior policyholders. These seniors have used the funds to offset living expenses, improve their quality of life after retirement, pay for health care expenses and assisted living stays, purchase vacation homes, and fund alternative financial planning products like annuities, long term care insurance and even replacement life insurance coverage. In each case, a life settlement was much more financially beneficial than lapsing, canceling or surrendering the policy.

1. Term Conversion:
   
   Mr. Wilson's 20–year term policy was reaching its conversion deadline. He was now 79 and was recently diagnosed with coronary artery disease. Mr. Wilson could not afford to convert the policy and letting his $250,000 policy lapse would leave him nothing.
   
   Mr. Wilson applied to Mountain Financial and his policy was sold for $75,000. Mr. Wilson was able to recover all of the premiums he had paid into the policy, plus a handsome profit. He used the proceeds to pay off some debts, go on vacation, and add more funds to his retirement portfolio.
2. Unplanned Health Change:
   
   Dave was 76 and had just suffered a heart attack, which left him permanently disabled. His family was unprepared for this unfortunate turn of events. After learning of the Medicaid requirements and the cost of a care facility, the family was unsure how they were going to pay for his care.
   
   Fortunately, the staff at the care facility offered the life settlement option to Dave’s family when they found out about his $500,000 insurance policy. The family soon sold that policy for a $250,000 settlement, and eliminated the premium payments. These funds covered the three years Dave resided in the facility before his passing. The remaining cash was distributed to Dave’s original beneficiaries.
3. Additional Insurance Needed:
   
   An elderly couple had a $2.2 million policy held in an insurance trust that covered the wife. Due to savvy investing decisions, their estate had increased considerably and now the death benefit on the policy was inadequate. The premiums on this policy were also escalating and the policy was becoming outdated.
   
   Their estate planner decided to sell the policy to help fund the purchase of a $4 million dollar joint survivorship policy. Mountain Financial was able to negotiate a $440,000 purchase price. Since the husband was in perfect health, the premiums on the survivorship policy were very affordable, even lower than the original policy.
4. Key–Man:
   
   A company owns a $4 million dollar policy on an executive who had retired 4 years prior. The surrender value was $440,000 and since the company no longer wished to make the $80,000 p/y premium payments, a surrender was being considered.
   
   Their financial advisor immediately recommended a life settlement. The company was offered $880,000 for the sale of the policy and netted $800,000 after taxes, almost doubling the cash surrender value!
   
   In this case, the surrender value in the policy was lower than the $480,000 cost basis. Therefore, there was a capital gains tax of $80,000 on the $400,000 income generated (the difference between the settlement amount and the cost basis).