Life Settlements

Case Study

A new year means new goals and new planning opportunities, including any adjustments that need to be made to an insurance portfolio inside of an estate plan or business plan. Once the client’s time horizon has been considered and the policy review has been completed, options should be reviewed to implement a modified plan that fits the current needs of the client. If a client has an abbreviated lifespan and needs to adjust their short-term planning, we recommend considering a life settlement as an exit strategy for policies that are no longer needed.

We recently helped one of our Valued Clients navigate a life settlement as their exit strategy for a premium-financed policy. At age 67, Valued Client’s Irrevocable Life Insurance Trust (ILIT) implemented a $3M life insurance policy for estate planning purposes. At Valued Client's age 78, the ILIT’s Trustee wanted to explore alternatives, since he did not feel he was getting a good ROI when compared to real estate investments. We helped Trustee complete a tax-free 1035 exchange of the existing policy, moving the cash value into a new proprietary policy with no surrender charges.

The new policy was implemented with the intent to pay premiums via a premium financed design whereby a lender would provide the funds for the premium payments and the ILIT would only pay the annual interest on the loan. The proprietary product provided higher cash values throughout the life of the policy (when compared to a retail product), so there was no secondary collateral expected for the first five years of the policy. Trustee understood that refinancing down the line may become necessary and was comfortable with such an approach given his vast experience in borrowing money for real estate and other enterprises. He also understood that future secondary collateral requirements were dependent on the lender’s loan terms and annual policy performance. These are important points to consider when contemplating a premium financed policy.

At Valued Client's age 87, the high-interest rate environment and the lender’s collateral requirements made Trustee consider a life settlement as an exit strategy for the policy. If he surrendered the policy outright, the surrender value would have been $1.2M. The loan balance was $1.8M, so he would have had to pay $600,000 out of the ILIT to eradicate the loan and free up the collateral. Valued Client’s life expectancy was estimated at 63 months, which netted the ILIT $2.3M in the life settlement market. After paying off the loan, the ILIT received $500,000 in exchange for the policy’s eventual death benefit. Trustee sold the policy, paid off the loan, ended the interest payments, released the collateral, and made a profit for the ILIT.

Contact us with any questions or opportunities to help you or your clients achieve identified goals. We look forward to hearing from you.