However, using new, cutting-edge risk transfer technologies, life settlement companies can now cater to a much larger field of clients. These financial innovations allow them to disperse some of the risks involved in these deals into the capital markets and the property-casualty insurance market. Because of this, they can offer healthier candidates as young as 55 the ability to monetize their insurability.
Ideal candidates for this new generation of life settlement transactions must still meet the life insurance industry’s net worth and/or income requirements. The minimum financial qualifications are a net worth of $5 million or an annual income in excess of $1 million. Also, life insurance companies usually require a medical examination, as with any life insurance policy.
These new transactions aimed at younger clients generate financial rewards over a fixed period, generally varying from two to 10 years, and payouts can be tailored to the needs of individual clients and their unique situations. Also, they need not always be designed from scratch. Individuals who already have life insurance policies in force, but who no longer need them, should not allow them to lapse. A specialist in this field can analyze any form of life insurance, whether universal, variable, term or whole life, to determine its realizable value.
Life settlement transactions have varying degrees of rigidity—some cannot be changed, while others may be modified—so clients must consider the consequences of entering into these deals carefully. In most cases, people who exploit all their insurance capacity by obtaining a policy to provide death benefits for their families, and by then monetizing the balance, cannot increase the amount of insurance they carry, unless their insurability value (that is, their projected net worth or income) increases.
Financial advisors who understand this product can help clients find and vet transactions that are most appropriate for their age, net worth and goals. They must consider a range of factors, including the terms of the life insurance policies or programs, the face values, the policy crediting rates and the carriers’ attitude toward the settlement industry. Advisors must scrutinize these proposals for both their long- and short-term considerations—the commission a life agent stands to earn should not be the only issue given serious analysis. The tax consequences of these transactions also vary. Individuals considering them should determine whether a particular deal’s payout will be treated as capital gains or ordinary income tax; in some cases it is not taxed at all.
Few of us like to consider the financial benefits of our own death; we prefer to dwell on the financial benefits of life. As a result, many individuals have a poor understanding of how to leverage and maximize this sizeable and free asset on our personal balance sheets. Those who take the time to understand it may find it has the potential to add millions of dollars to their net worth.
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