Life Settlements:
Understanding The Benefits Of And Properly
Utilizing The Secondary Insurance Market
Presented By Doug Himmel
WHAT IS A LIFE
SETTLEMENT?
A Life Settlement is the sale of an existing
life insurance policy to a third party via
the secondary institutional market in
exchange for an immediate lump sum
cash payment that is less than the
policy’s face value, but higher than the
policy’s cash surrender value.
In a Life Settlement, the policy owner is
relieved from making future premium
payments.
LIFE SETTLEMENTS
HISTORICAL
BACKGROUND

US Supreme Court Laid The Foundation

Case of Grigsby v. Russell (1911)

Justice Oliver Wendell Holmes noted in his opinion that life
insurance possessed all the ordinary characteristics of
property, and therefore represented an asset that a policy
owner could transfer without limitation.

This opinion placed the ownership rights in a life insurance
policy on the same legal footing as more traditional
investment property such as stocks and bonds. As with these
other types of property, a life insurance policy could be
transferred to another person at the discretion of the policy
owner.
LIFE SETTLEMENTS
PROGRESSION

Evolved from Viatical Settlements in the 1990’s

Clients Terminally Ill
Private Investors

Young Insureds (some as young as 25 yrs old)

Policies as low as $25,000


Past 5 Years, Institutional market has developed
 Healthier individuals and companies who have had a change of need or a
change in financial condition



> 70 years old
Policies > $500,000
Only Institutional Investors (Credit Suisse, Deutsche Bank, AIG, Wells
Fargo, etc)
Industry Statistics


$18.39 Trillion inforce 2005
$19.11 Trillion inforce 2006



According to the American Council
of Life Insurers:
 88% of Universal Life policies
are lapsed or surrendered without
ever paying a death benefit.
 Furthermore, it is believed that 99
percent of term life insurance
policies are lapsed without ever
paying a death benefit.


$15 - $20 Billion settled in 2007
18 – 22 % of DB average offer
74 yr old male is average insured
250 - 400% increase average over
CSV or 3 to 5 times the current
value
Since 2001, over a billion dollars
in excess of the cash surrender
value has been paid to policy
owners who chose to sell, rather
than lapse or surrender their life
insurance policy.
WHAT POLICY TYPES
ARE ELIGIBLE







Universal Life
Term Life
Whole Life
Variable Universal Life
Group
Survivorships
Corporate, Individual or
Trust owned
PARAMETERS OF A
LIFE SETTLEMENT

How much will be received for a
policy? There are many factors that
determine the offer amounts:








Age
Premiums
Client’s Health
Type of Policy
Insurance Company Rating
Policy Size
Competitive Bidding
State of Residency

General Rule: Age,
health and future
premiums are the
primary factors that
determine the amount
of the Life Settlement
offer. Competitive
bidding assures that
you have found the
highest offer.
WHO MAY
QUALIFY?

Anyone age 70 years or older
with Life insurance greater
than $500,000 face value
whose circumstances have
changed since the original
policy was issued.
Health
Financial
Personal
PEOPLE OFTEN
HAVE CHANGING
CIRCUMSTANCES…














Under-Performing Policies
Sale of Business/M&A
Succession planning
Divorce or Bankruptcy
Death of Spouse/Beneficiary
Estate Size Growth or Reduction
Tax Reform
Family Issues / Changes
Deterioration of Health
Considering a 1035 Exchange
Policy Donation
Declining Financial Performance
Loss of Key Executives/Retirement
Corporate Restructuring
BENEFITS TO THE
CLIENT…






Monetizes Often
Overlooked Asset
No Obligation
Immediate Capital
Relief of Premium
Expense
Maximizes Asset
Recovery
Alternative to
Surrendering or Lapsing a
Policy
LIFE
SETTLEMENTS
An Innovative Retirement,
Estate Planning,
Philanthropic and Liquidity
Generation Tool
SETTLEMENT
TIMELINE
Upon Receiving the
Following:
1. Completed application
& signed authorizations
2. Copy of policy, if
obtainable
Continue…
TIMELINE
CONTINUED
Appraisal Process Consists of:
Completing the Settlement Process:
1.
Collection of policy and medical
information
1.
Contracts are delivered to the referring
professional for the policy owner
2.
Obtaining multiple LE reports
2.
Review, sign and return of settlement
contract package
3.
Complete initial underwriting of
case (medical and illustrative)
3.
Escrow account opened and change
instructions sent to carrier
4.
Send complete case to funding
organizations
4.
Record ownership changes by insurance
carrier
5.
Negotiate and obtain offers or
declinations
5.
Escrow company releases cash settlement
to client
6.
Communicate appraisal value
6.
Client rescission period
– State specific
FINDING A
BROKER




Represent multiple
institutionally owned
funding sources (30+)
Act as fiduciary to the
policy owner and Financial
Representative
Full transparency on offers,
including funding source
Doesn’t work with private
buyers




Industry experience of at
least 3 years
Provide list of state licenses
Doesn’t buy policies for
own investment
Uses 3rd party Escrow
Services
EXPERIENCED
SETTLEMENT ADVISORY
PROFESSIONALS
MELVILLE CAPITAL UTILIZES
ONE OF THE INDUSTRY’S
LARGEST NETWORKS OF
OVER 50 INSTITUTIONAL
BUYERS TO COMMAND
THE HIGHEST OFFERS FOR
YOUR CLIENTS
Licensed Insurance Professionals With
Financial Services Backgrounds





Innovative Take-to-Market Strategy



Multiple LE’s (Life Expectancy’s)
Canvassing the market
Actuarial Assessment


Full Disclosure Policy
Auction Environment
Maximizes Settlement
Amounts
Back Office Processing Staff
Close Attention to
Compliance
Tools & Client Support
Education
CASE HISTORY
ESTATE PLANNING
Male age 77 and Female age 76
$5,000,000 Survivorship UL
LIFE SETTLEMENT
SOLUTION


Policy underperforming

Updated planning, only need $2MM

$285,000 CSV


If 1035, projected premiums =
$84,000/yr


Net offer = $700,000
Use as lump sum dump,
new policy
Projected annual
premiums = $53,000
$31,000/yr savings
CASE HISTORY
M&A
Business owner – Age 72
LIFE SETTLEMENT
SOLUTION
$25,000,000 UL Policy –
corporate owned






Selling company
Has personal coverage
Wanted $30MM net for
company
Offered $28MM plus fee’s
Sale in jeopardy…


Transfer policy
ownership to Insured
Settlement Amount of
$4,750,000
Insured ends up with
more than anticipated
CASE HISTORY
Philanthropic
CRT – Alternative
MALE – age 76
$2,500,000 UL Policy
Cost basis = $300,000
CSV = $39,000



No longer needs policy
Desires to be more supportive of
charity
Could donate to charity for
deduction of CSV and make
premiums each year as additional
contribution to receive deductions





Set up CRT
Obtain appraisal of policy in
the secondary market =
$540,000
Donate policy to CRT and
settle policy
Get deduction based on the
$540,000
Receive annual income
stream from proceeds
CASE HISTORY
Corporate Bankruptcy and
Term Conversion
MALE – Age 73
$15,000,000 Term Policy
LIFE SETTLEMENT
SOLUTION

(Policy was in 30 day Grace Period)





Bankruptcy of Home Goods Merchant
Policy Insuring Company Founder
Failed Private Equity Acquisition
Senior Creditor Trying to Recover
Portion of Exposure



Identified Significant
Market Value
Policy Immediately
Brought Back In-Force *
BK court permission
Policy converted to UL
from TERM
Settlement Amount of
~$2,700,000 roughly equal
to entire BK claim of Sr.
Lender
CASE HISTORY
Personal Needs
Female – Age 81
$1,400,000 UL Policy
LIFE SETTLEMENT
SOLUTION
( CSV = $46,000)





Husband passed away
Children grown and successful
Feels policy is excessive
Wants monthly income stream


Settlement Amount of
$327,000
Proceeds invested into
immediate Annuity
* Received $281,000 over
surrender
CONTACT
INFORMATION
Douglas Himmel
Managing Director/Partner
11845 W. Olympic Blvd - Suite 510,
Los Angeles, CA 90064
(866) 511-5990 (Phone)
(631) 390-2422 (Fax)
DHIMMEL@MELVILLECAPITAL.COM
Disclaimer

Life Settlement amounts are based on numerous factors. The
case examples are for illustration purposes and does not
represent future offers, statements, percentages or amounts.
Actual results will vary. The industry average purchase price
obtained by viators ranges from 12-24% of the face amount of
a qualified life insurance policy. Some or all of the proceeds
of a life settlement may be taxable under federal or state
income tax laws from the sale of one's life insurance policy.
Advice from a professional tax advisor is recommended.
Melville Capital is a licensed broker or producer.