Life Settlements & TOLI Administration: A Must Know For Trustees
As a trustee in TOLI administration, Life Settlements are an important field of knowledge. Most seniors in the US are unaware of this option, and as a result, seniors surrender or lapse over $112 billion dollars in life insurance death benefits (source: LifeHealthPRO 2.25.2015). Many do not realize that they have options, but grow tired of the premium payments and walk away without maximizing the value of their lifelong asset. For the uninformed consumer, this could be just a lost opportunity. For the TOLI trustee, this can be a source of potential liability.
An alternative to a policy lapse or surrender is a life settlement, the sale of a life insurance policy for a lump sum greater than the policy’s cash value and less than the death benefit. The insured client of the policy will maintain it by paying the policy premium until the death of the insured.
THE HISTORY OF LIFE SETTLEMENTS
During the 1980s, AIDS victims sold their life insurance policies to a third party. They used the resulting lump sum payments for medical care in the final years, and sometimes months, of their life. This sale grew what is now the broader Life Insurance industry. Professionals made these types of policy sales less common by advancing AIDS treatments. Yet the sale of life insurance assets grew into the life settlements, or secondary marketplace, that we see today.
Originally, officials lightly regulated the industry. This resulted in some sources taking advantage of policy sales. Today, the vast majority of states heavily control the sale of Life Insurance. These states have strict regulations that provide a framework for the orderly transfer of policies. The required consumer disclosures that these policies contain protect the policy seller. The improved regulations have dramatically decreased issues in the sales process.
THE IMPORTANCE OF LIFE SETTLEMENTS FOR TOLI TRUSTEES
TOLI trustees must consider life settlements as an option. Changes in the estate tax, increased policy costs, and the evolution of trust goals cause more “unwanted” policies for trustees. Those who have attended our ITM University sessions know that we have developed methods to maximize the value of life insurance policies. It is our trustees’ responsibility to maximize the value for their clients. Life settlements are a way to achieve that.
Typically, life settlements are available to insureds age 65 and older. Health, however, will play an important role in whether an offer is forthcoming. Most policies sold are universal life policies – especially current assumption universal life. Other policies, even term insurance policies that can be converted to a permanent policy, can still be sold. The offers depend on the death benefit of the policy, the annual premium needed to carry the policy, the life expectancy of the insured, and the rate of return that the buyer needs to make the purchase a viable investment.
The sale of a policy has potential tax implications to the seller. A life insurance policy held in trust until a death benefit is paid is received income and estate tax free. However, if a policy is sold, there is a possible tax liability to the trust.
HOW TO LEARN MORE
While all the advantages and disadvantages of a policy sale are beyond the scope of this article, we believe that the full discussion of life settlements in the trust owned life insurance world is important enough to schedule a webinar session. This will provide a TOLI trustee with a thorough understanding of the process. Our next free webinar session, entitled Learning When Why and How to Do a Life Settlement, will be held on March 28th at 2 p.m. Eastern Time. It will provide one hour of continuing education for CFP, CTFA and FIRMA members.