More on Whole Life Insurance, Life Settlements and how to play the game.

What is a Life Settlement and why would I entertain the process?

Given recent and ongoing market corrections, various Ponzi schemes like Madoff, and a general unwinding of “the Wealth Effect” many people are looking to generate cash from current assets.

Also given the real estate and credit markets are virtually frozen especially at the top end Aspenites may conclude that they few options for generating cash outside of traditional means.

However one asset that many may over look is a whole Life Insurance policy.

Historically, an individual had only three or four options if they either no longer wished to pay premiums or wanted cash out of a policy that they held.

1. Surrender the policy for paid up – Call the insurance company and ask them what amount of death benefit you could get from the premiums that you have already put in.
2. Surrender the policy for cash value – Contact the insurance company and ask them to give you all of the cash value in the policy and discontinue the death benefit. This can be fairly disastrous with some policies especially the Guaranteed Universal Life type of contracts that we use for Estate Planning purposes that favor death benefit over cash value. Many times these policies will have a very small cash value as a percentage of death benefit.

3. Allow the policy to lapse – This would be just discontinuing premiums without contacting the insurance company. This is the reason that insurance companies have some of the largest buildings in the world. See item 1 or 4; surrender your policy for paid up, or have it reviewed as opposed to this option.

4. Lastly you can talk to a good Life Insurance broker and use the cash value in your policy to get substantially more Death Benefit from your current Whole Life Insurance policy. The fundamental reason this is possible is that people are living longer. Much like a refinance on your home if you have a policy that was issued before 2001 when the government mortality tables were revised you can have your contracts reviewed and get much more coverage for the same or less premium than the previous contract. By way of example, consider client who had 1MM in coverage with several policies that were taken out in the early nineties. For the same premium plus the cash value in his current contract, (subject to health underwriting) I could get him 2 MM in coverage. If he decided to discontinue the premiums I could still get him about the same amount of coverage that he would have currently.

However, now a new option has presented itself. A secondary market has developed for Whole Life Insurance. Hedge funds, institutional investors, and a variety of people who wish to make a good rate of return may purchase your policy for substantially more than your current cash value. So now your whole life insurance policy may have a current fair market value that can be determined by using a broker to submit your policy to multiple investors.

Do keep in mind that there is one type of Life Settlement that has somewhat of a shady element to it. Some of my acquaintances about town have been solicited by out of town concerns for Life Settlements wherein the owner or insured applies for a large insurance policy and finances the premiums with non recourse premium financing at application for the insurance. This is done with the intent of selling the policy up front. Keep in mind that the application for insurance has multiple questions regarding the sale of the insurance and that you as an insured could potentially be in some hot water if it is subsequently found out that your application had material misstatements on it. If you are involved in this I would ask to see a copy of the application that was submitted to the insurance company. It would be my recommendation to play it straight and apply for your policy initially for legitimate Estate or Wealth transfer purposes.

Drew Kitchell is an Aspen local Financial Advisor, he can be reached at dkitchell@FPaspen.com or his blog about things financial and things Aspen is www.ResortTownBlog.com