How a Senior
Settlement (Life Settlement) Works
In a life settlement transaction, there
is a chain leading from the seller of the policy to the end buyer of the policy
(known as a life settlement provider.) Each link in the chain has a
different responsibility in facilitating the transaction and ensuring that it
runs smoothly, while outside vendors typically assist the provider with
specialized functions.
Policy Sellers
Senior citizens who have the greatest chance of selling their policies generally
are over 65 years of age, have a calculated life expectancy of more than two
years, but less than ten years, and may have experienced a health change that
has led to their insurance premiums increasing. This undesirable scenario, often
coupled with increasing health care and/or nursing home care costs, makes a
senior settlement an attractive option to many seniors. There are certain
restrictions for their policies as well - policies must be valued at $100,000 or
more, and depending on the life expectancy determination of the seller, any and
all types of policies can be sold, ie; universal life, whole life, or
convertible term contracts.
Financial Advisors
Senior clients often discuss life settlement transactions with their financial
advisors instead of conducting the transaction on their own, since their
advisors are usually much more familiar with this non-mainstream financial
product. Some examples of advisors that are becoming increasingly involved in
the life settlement arena are:
Accountants/CPAs
Attorneys (especially Elder Law Attorneys)
Financial Planners/CFPs/ChFCs/CFCs
Estate Planners/CEPs
Certified Senior Advisors/CSAs
Charitable Trust Officers
Senior Settlement Brokers
The decision to work with a broker is up to the client, since financial
advisors can submit the client's case to the life settlement provider
directly. However, in an industry where market value for life insurance
policies is not common knowledge, Senior Settlement Brokers
typically do the best job of obtaining fair market value for a senior
citizens policy. By submitting life settlement cases to multiple
providers, they are able to obtain a greater number of bids overall, and
help facilitate negotiations between high bidders. For a list of
qualified, licensed brokers, please visit the LISA website.
Senior Settlement Providers
Life settlement providers are responsible for paying the client a
cash sum greater than the policy's cash surrender value. The top
providers in the industry fund many transactions each year and hold the
seller's policy as a confidential portfolio asset, and do not make it
available to outside investors. They also have in-house compliance
departments to carefully review transactions, give seminars to both
financial professionals and senior citizens about life settlements, and
most importantly, they are backed by institutional funds from a major
bank.
Other Involved Parties in
Senior Settlement Cases Underwriters
- Provide life expectancy estimates on the insured for pricing purposes.
Funding Sources - Banks that provide institutionally funded firms with cash for
payments.
Steps in a Senior Settlement Transaction
Senior citizen with financial needs consults with an advisor, decides to sell
his or her policy.
Client & advisor select a broker who works with institutional providers.
Broker submits case (and client releases medical information) to various
providers.
If policy meets criteria for a life settlement, providers send offers to the
broker.
Client accepts their preferred offer.
Client and advisor complete the provider's closing package, and return essential
documents.
Provider places cash payment in escrow and submits change of ownership forms to
the insurance carrier.
Paperwork is verified and funds are transferred to the policy seller.
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