Can I Buy Someone Else’s Life Insurance Policy?

Weatherford life insurance lawyers, this writer included, have represented clients trying to recover proceeds from a life insurance policy purchased by third parties. The answer is yes. WealthManagement.com purchased an article discussing this issue. It is titled, Facilitating Life Settlements.
As growing numbers of aging baby boomers turn to their advisors to help them achieve their retirement and estate planning objectives, many estate attorneys are faced with decisions regarding life insurance policies purchased that are no longer relevant. Life settlements have steadily gained greater recognition as a vital financial planning tool. Yet, some estate attorneys may be hesitant to recommend them until they gain deeper insight into the “inner workings” of what they view as a nascent industry with a still-maturing regulatory environment.
Based on our experience, estate attorneys have three priorities relating to life settlements.
1) Be confident of the market’s stability and know that it operates within a regulatory framework that protects consumers.
2) Acquire a better understanding of specific planning scenarios in which the solution can benefit their clients.
3) Avoid disappointing their clients by setting realistic expectations about the outcome.
For nearly 20 years, the secondary market for life insurance has been an option for policy sellers seeking to optimize the cash value of unwanted life insurance policies. The market recently has seen resurgence, as evidenced by a substantial increase in transaction volume during 2015. The market’s recent comeback is due to a number of factors, including a more stable regulatory environment that protects consumers and the infusion of investment capital from major financial institutions who are attracted to its non-correlated asset class. The increase in capital investment has given secondary market providers (those who acquire policies on behalf of portfolio investors) greater purchasing power for policy acquisitions. This is good news for senior consumers looking to sell policies for the highest possible value, often referred to as the policy’s “fair market value.”
In terms of the regulatory environment, 42 states now regulate life settlements. To further protect consumers, a handful of states have recently enacted life settlement disclosure laws requiring that policy owners be made aware of life settlements as a possible alternative to lapse or surrender. Federal and state government agencies have begun to recommend life settlements as a solution to pay for long-term care expenses or to offset public funds used for Medicaid nursing home care.
The secondary market continues to gain traction because it benefits consumers seeking to monetize a static insurance asset, as well as investors seeking returns not tied to the volatility of the stock market.
In most estate plans, life insurance is a key component to: provide liquidity for income replacement, payment of debts or taxes, fund buy-sell agreements and accomplish other goals. But as clients age, their estate planning objectives often shift. Business owners retire, tax laws are revised and legacy planning for one’s heirs takes on a new focus. As a result, the role of life insurance in the estate plan may become obsolete and expensive premiums may be draining the estate’s assets.
In situations in which a life insurance policy no longer has relevance to the client’s estate plan, attorneys will typically weigh all of the options with the client (for example, letting the policy lapse, surrendering the policy, reducing the death benefit or selling the policy in the secondary market).
We recently worked with an estate attorney on a case that had a successful outcome for a retired business owner with three life insurance policies totaling $11.6 million. The attorney explained that his client had borrowed large sums of money over the years to finance a handful of businesses. His exposure to debt made it necessary to purchase large amounts of insurance coverage to protect his family from bankruptcy in the event of his death. But when the business owner sold his businesses and retired, he was burdened with expensive premium payments for insurance coverage he no longer needed, one of which was a key man policy.
The attorney suggested his client sell the policies in the secondary market to optimize their asset value. The client agreed, and the attorney contacted us to outline the client’s three primary objectives: (1) provide relief from expensive premium payments, (2) retain a reduced amount of paid-up insurance coverage and (3) receive a cash payment for estate plan liquidity purposes.
After completing the underwriting process, we initiated the bidding process, which was met with a number of challenges. Achieving the client’s objectives required intense negotiations with multiple institutional funders, each of whom have unique funding requirements. In the end, we were able to broker a transaction involving two separate funders that provided the client with relief from future premiums, $2 million in retained life insurance coverage and a cash payment exceeding $240,000.
The client was very satisfied with the outcome and grateful to his attorney for spearheading it.
When discussing the life settlement option with clients, attorneys will want to set realistic expectations, as funders are very selective in the types of policies they’ll purchase.
To gain insight into the criteria that funders are seeking, an attorney may want to speak with an experienced life settlement broker. Although most successful life settlement transactions involve a senior over the age of 70 with a reduced life expectancy and a policy face value of at least $500,000, other factors also play a role (for example, the cost of future premium payments, policy loans, cash build-up and the rating of the insurance carrier). The broker will gladly provide this insight to the attorney.
It may be surprising for some attorneys to know that for every 10 policies that are submitted to secondary market funders, one to two (on average) result in a successful life settlement transaction. The reasons for this vary. In some instances, policies are rejected for settlement because they don’t meet the funder’s investment criteria as summarized above. In other situations, the funder may have extended an offer but the insured rejected the settlement offer or simply changed their mind.
Estate attorneys play a key role in helping clients position assets for the greatest possible benefit, and incorporating life settlements into their tool box can often pay great dividends in the right situations.