Turn unneeded policies into cash: a life settlement can be a better alternative than surrendering a policy.Life insurance planning isn't always about making sure someone has enough coverage. It's also about finding solutions for people who have too much. For them, it's a question of whether it's better to continue paying premiums in hopes of a gain at maturity or recoup recoup
To sell an asset at a price sufficient to recover the original outlay or to offset a previous loss. some of that investment immediately by surrendering the policy. High premiums often put policy owners in a difficult position--especially if their insurance needs have changed. Corporate policy owners face similar concerns when dealing with key-person or split-dollar policies insuring departed executives or with insurance purchased to fund an obsolete buy-sell agreement buy-sell agreement n. a contract among the owners of a business which provides terms for their purchase of a withdrawing partner's or stockholder's interest in the enterprise. .
In some instances the best alternative is neither to hold the policy nor to surrender it. This article explains how CPAs can use a third option--a life settlement--to help eligible clients and employers dispose of unneeded life insurance policies now for more than the cash value rather than wait for the policy to pay off at the insured's death.
LIFE SETTLEMENTS--WHAT THEY ARE AND AREN'T
A life settlement turns insurance assets into cash, giving the original policyholder Policyholder
An individual who owns an insurance policy. an amount greater than the cash surrender value The amount of money that an insurance company pays the insured upon cancellation of a life insurance policy before death and which is a specific figure assigned to the policy at that particular time, reduced by a charge for administrative expenses. in exchange for ownership of the policy. This option creates immediate revenue for companies or individuals holding unprofitable or unneeded policies.
Life settlements are not viatical settlements viatical settlement
Arrangement by which a terminally ill patient's life-insurance policy is sold to provide funds while the insured (viator) is living. The buyer (funder), usually an investment company, pays the patient a lump sum of 50–80% of the policy's face , which terminally ill Terminally Ill
When a person is not expected to live more than 12 months.
Any gifts given out by the afflicted person at this time may be considered as a dispersion of the estate rather than a gift. policyholders often use to raise quick cash. Rather, the typical life settlement candidate has a life expectancy Life Expectancy
1. The age until which a person is expected to live.
2. The remaining number of years an individual is expected to live, based on IRS issued life expectancy tables. of between 2 and 12 years. The best prospects for such transactions are age 65 or older, have experienced a change in their health and are insured by a policy with a face amount of at least $100,000.
When an individual or business engages in a life settlement transaction, the amount it recoups is based on the policy's face amount and cash surrender value as well as other factors, such as the insured's health, age and the current policy premium.
In a recent survey of accountants, attorneys, estate planners Estate Planner, a professional that creates an estate plan. This professional works with an estate owner to maximize their goals. This is a legal and tax specialty for an attorney or an accountant. and insurance professionals by Maple Life Financial, a Maryland-based life settlement provider, 45% of respondents had clients over age 65 that had surrendered a life insurance policy for its cash value. Many instead could have qualified for a larger cash payment from a life settlement. Considering that cash surrender values average just 4% of policy face amounts, the decision to recommend a life settlement is an easy one for CPAs advising employers or clients unaware of the potential economic gain from these hidden assets hidden assets
Items of value that are owned by a firm but do not appear on its balance sheet. For example, a trademark or patent may be a firm's most valuable owned asset; yet, it would not appear as such on its balance sheet. .
When providing financial advice and strategic information to clients or employers, CPAs have a fiduciary responsibility to identify effective ways to eliminate assets that burden the client or employer with unnecessary expenses. For CPAs in public practice, marketing and promoting life settlements can be easy; many accountants have clients that fit the life settlement eligibility profile. Any number of situations can create the need for a settlement, including
* A change in interest rates that results in increased policy premiums.
* A change in a policyholder's business situation.
* A need for cash to fund medical or long-term care long-term care (LTC),
n the provision of medical, social, and personal care services on a recurring or continuing basis to persons with chronic physical or mental disorders. .
* Improved estate liquidity, a decrease in estate value or elimination of the federal estate tax, making an existing policy unnecessary.
* Departing executives or business owners, making policies redundant.
To start the process, select a professional life settlement broker to help get the best possible offers for the policy you wish to dispose of To determine the fate of; to exercise the power of control over; to fix the condition, application, employment, etc. of; to direct or assign for a use.
See also: Dispose . Look for one with experience in the field and connections to major settlement providers. Exhibit 1, below, lists some questions CPAs should ask a broker in choosing one to represent a client or employer in a life settlement transaction.
It's important to select a broker who represents institutionally owned and funded settlement providers. These entities typically purchase policies using funds invested by large banks or financial companies as opposed to drawing on cash fronted by a loose organization of private investors. An institutionally owned and funded provider usually has more cash available to invest in policies and will adhere to adhere to
verb 1. follow, keep, maintain, respect, observe, be true, fulfil, obey, heed, keep to, abide by, be loyal, mind, be constant, be faithful
2. high ethical standards to protect both consumers and the entity's broader business interests. They also hold purchased policies in confidential portfolios. Most institutional funders are members of the Life Settlement Institute, a national trade association that represents institutionally funded companies. (See the list of life settlement providers in exhibit 2, at right.)
Another factor for CPAs to consider is whether the settlement provider has a strong due diligence Research; analysis; your homework. This term has caught on in all industries, because it sounds so "wired." Who would want to do analysis or research when they can do due diligence. See wired. and compliance program. Good due diligence will protect everyone's interests through background checks of all parties involved in the transaction, including the policy owner. A good compliance department will monitor and manage licensure licensure
(lī´snsh , fraud prevention, broker-dealer issues and consumer privacy and ensure the company follows all federal and state regulations that apply to life settlement transactions.
As part of the process the broker submits the policy to selected providers, who review its terms and make an offer based on their calculation of the insured's life expectancy and other factors. Before advising clients or employers on whether to accept an offer, remember to discuss with them the commission they will pay the broker, how they should complete the closing package and the tax implications of life settlement transactions (discussed in greater detail below). Once you accept an offer and submit a complete closing package, it will be only a matter of days until your client or employer receives a cash payment for the policy.
A case in point. Let's look at a scenario involving a 77-year-old female who owns an insurance policy with a $900,000 face amount and a current cash surrender value of $68,296. Karen Jones originally purchased the policy for estate planning Estate Planning
The overall planning of a person's wealth, including the preparation of a will and the planning of taxes after the individual's death.
Contrary to popular belief, estate planning involves much more than preparing a will, and it is not only for the purposes. Since both of her children now are married and financially secure, she believes she no longer needs the policy and has no desire to continue paying the premiums. Jones's CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. suggests she sell the policy to a life settlement provider. After working with her accountant to select a provider she receives $314,735 for the policy--an economic gain of $246,439 over the cash value she would have received from simply surrendering the policy. After setting aside some money to pay the taxes, she uses the policy proceeds to make donations to her two favorite charities.
UNNEEDED BUSINESS POLICIES
With more frequent activity between corporations--mergers, acquisitions, bankruptcies and top executives' changing jobs--it is becoming more important than ever for CPAs to review corporate insurance portfolios for life settlement candidates. Life settlements involving unneeded key-person or buy-sell policies can provide businesses with increased cash flow to solve immediate financial needs, while transactions concerning split-dollar policies can help facilitate retirement planning Retirement financial planning refers to a collection of systems, methods, and processes which, in their aggregate, support a family unit's (client's) desire to achieve a state of financial independence, such that the need to be gainfully employed is optional. and charitable giving. For example, a partner still may own the remaining policy funding a buy-sell agreement after the other parties have retired. A life settlement option allows the surviving partner to earn cash for the policy, which he or she can use to buy a policy better suited to the company's current needs or reinvest re·in·vest
tr.v. re·in·vest·ed, re·in·vest·ing, re·in·vests
To invest (capital or earnings) again, especially to invest (income from securities or funds) in additional shares. into the business.
Another case in point. Over time the Widget Pronounced "wih-jit," for decades, the term has been a popular word for a generic "thing" when there is no real name for it. It is often used to describe examples of made-up products along with other fictitious names; for example, "10 widgets, 5 frabbits and 2 dingits. Corp. purchased a combined $6 million in key-person life insurance on its CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. , Walter Smith Walter Smith OBE (born February 24 1948 in Lanark) is a Scottish former football player, but is better known as a football manager. He is currently the manager of Scottish Premier League club Rangers, his second spell in that capacity with the club. . After many years of employment with the company, Smith left to pursue other interests. At the time he left the company Smith was age 81 and the policies had a combined cash value of $109,500. Although Widget could have waited until Smith's death to receive the full policy benefits, its annual premium payments were extremely high. The company's controller recommended the board of directors consider a life settlement. Widget Corp.--the policyholder in this case--engaged in a life settlement transaction and received $1.2 million--nearly 11 times the cash surrender value.
DON'T FORGET TAXES
Life settlement transactions can be subject to income taxes depending on the amounts involved. While there are no specific Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. provisions pertaining per·tain
intr.v. per·tained, per·tain·ing, per·tains
1. To have reference; relate: evidence that pertains to the accident.
2. to life settlements, there are some general guidelines guidelines,
n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. CPAs can use to help determine the tax implications.
* If the policy has no cash surrender value, or the surrender value surrender value
See cash surrender value. is lower than the policy cost basis (the total amount of premiums paid), then the amount of taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. is the difference between the settlement amount and the cost basis. That amount is treated as a capital gain.
* If the cash surrender value is higher than the cost basis, then that difference is treated as ordinary income and taxed at the policy owner's marginal tax rate Marginal Tax Rate
The amount of tax paid on an additional dollar of income. As income rises, so does the tax rate.
Many believe this discourages business investment because you are taking away the incentive to work harder. . The difference between the settlement amount and the surrender value is a capital gain.
* If the policy cost basis is higher than the settlement amount there should be no taxable income from the transaction.
CPAs should advise clients and employers that specific situations may result in different tax consequences. Calculating the projected tax liability always should be part of the decision-making process before agreeing to a life settlement offer.
Many states have adopted laws and regulations covering life settlement transactions and viatical settlements. As of June 2005, 26 states had life settlement laws and 10 more were considering such legislation. Before recommending a life settlement to a client or employer CPAs should check to see what rules apply in their state for licensing requirements (some states may require the CPA to have an insurance license), distribution options, consumer protection and related issues.
The beauty of life settlement transactions is that every party benefits, resulting in high levels of satisfaction among all links in the chain, including the CPA. Discovering the flexibility and profitability of these opportunities can help CPAs provide the best alternative to clients or employers for dealing with financially burdensome or lapsing life insurance policies. With the possible repeal of the federal estate tax still on the horizon, the number of unneeded policies may increase in the future.
* WHEN INDIVIDUALS OR BUSINESSES HAVE UNNEEDED life insurance policies they have three options: continue paying the premiums until the insured's death, surrender the policy for the cash value or find a third party to buy the policy in a life settlement transaction. The last alternative usually is the most attractive if the insured is over 65, has experienced a change in health and has a life expectancy of 2 to 12 years.
* LIFE SETTLEMENT TRANSACTIONS USUALLY result in higher returns for the policy owner than simply surrendering the policy. The actual settlement depends on the policy's face amount and cash surrender value, the insured's health and age and the current policy premium.
* THE FIRST STEP IS TO SELECT A BROKER TO HELP get the best possible offers for the policy. The broker will help choose an appropriate provider. An institutionally owned and funded provider usually has more cash available to invest in policies and will adhere to high ethical standards.
* A VARIETY OF SITUATIONS CAN CREATE THE NEED for a life settlement, including a change in the policyholder's business situation, a need for cash to fund medical or long-term care, changes in the insured's estate, bankruptcy or divorce.
* LiFE SETTLEMENT TRANSACTIONS MAY BE SUBJECT to income taxes. The actual amount of taxable income depends on the policy's cash surrender value, cost basis (total premiums paid) and how much the policy owner receives for the policy. Some of the proceeds may be ordinary income and some may be treated as a capital gain.
Life Settlement Facts
* Seniors own an estimated $500 billion in life insurance policies.
* Some $100 billion of these policies are eligible for life settlements.
* Life settlement providers will purchase $10 billion to $15 billion of insurance policies in 2005.
Source: "2005 Life Settlement Industry Outlook," Maple Life Financial, www.maplefinancial.com.
* When choosing a life settlement provider to acquire an unneeded insurance policy, select one that is both institutionally owned and funded.
* Make sure the provider performs appropriate due diligence on all parties before committing to a life settlement transaction.
* Calculate the estimated income tax liability in advance and advise the client or employer whether the life settlement transaction is in its best interest.
Exhibit 1: Choosing a Broker
* How many life settlement providers does the broker represent, and does it submit all cases to each provider? (if not, this may be a warning that there is an unfair agreement with a favored provider the broker has not disclosed that could be detrimental to the client.)
* Does the broker have due diligence materials for each of its life settlement providers, and will it provide the CPA with a summary of this material?
* Does the broker represent any private funding sources? If so, will it honor your instructions not to shop your policies to private sources (which we recommend avoiding)?
* How many life settlement transactions did the broker successfully fund in the last 12 months?
* What commission will the broker earn from the provider when a transaction is successfully completed?
* Is the broker licensed to do business in the necessary states to complete the transaction, and does it have errors & omissions coverage specifically for life settlement transactions?
Exhibit 2: Life Settlement Providers
7111 Valley Green Rd. Fort Washington Fort Washington, military post during the American Revolution, situated on the highest point of Manhattan island, New York City, overlooking the Hudson River opposite Fort Lee, N.J. , PA 19034 Phone: 877-836-8300 Fax: 215-402-8397 E-mail: firstname.lastname@example.org Internet: www.coventryfirst.com
Maple Life Financial
7316 Wisconsin Ave., #350 Bethesda, MD 20814 Phone: 877-777-0635 Fax: 301-951-1351 E-mail: email@example.com Internet: www.maplelifefinancial.com
Peachtree Life Settlements
6501 Park of Commerce Blvd., #140B Boca Raton Boca Raton (bō`kə rətōn`), city (1990 pop. 61,492), Palm Beach co., SE Fla., on the Atlantic; inc. 1925. Boca Raton is a popular resort and retirement community that experienced significant industrial development in the 1970s and 80s. , FL 33487 Phone: 866-730-4411 Fax: 561-962-7205 E-mail: firstname.lastname@example.org Internet: www.lifesettlementco.com
Vespers vespers (vĕs`pərz) [Lat.,=evening], in the Christian Church, principal evening office. In the Roman rite, vespers have consisted since the 6th cent. of a few prayers, five psalms, a lesson, the Magnificat, and an antiphon.
1101 30th St., NW, #111 Washington, DC 20007 Phone: 888-777-5432 Fax: 202-333-4662 E-mail: email@example.com Internet: www.vespersfunding.com
JAMES D. WARRING, CPA/PFS, CFP 1. CFP - Constraint Functional Programming.
2. CFP - Communicating Functional Processes.
3. CFP - Call For Papers (for a conference). , is in charge of wealth management services for Rubino & McGeehin, Chartered CPAs, of Bethesda, Md., and its affiliate, R&M Wealth Management Services, LLC (Logical Link Control) See "LANs" under data link protocol.
LLC - Logical Link Control . His e-mail address See Internet address.
e-mail address - electronic mail address is firstname.lastname@example.org.