In our last blog, we tackled the question of when to sell a life insurance policy. With past and potential future changes in the estate tax laws and the aging of the population in the typical TOLI portfolio, life settlements will become more prominent in the coming years. The TOLI trustee must become aware of the sales process, so we wanted to provide a short primer for trustees who need a better understanding of this valuable policy option.
A typical procedure can be broken down into six steps:
- Initial Inquiry and Appraisal: If a life settlement is contemplated, the viability of a sale is gauged by submitting limited health and policy information to a licensed life settlement broker who will prepare an initial appraisal and alert the trustee to the feasibility of a sale, without disturbing the grantor.
- Formal Underwriting: If it appears that a sale is a possibility, the grantor/insured will authorize the release of health information via signature on a HIPAA (Health Insurance Portability and Accountability Act of 1996) form. Information is obtained from various health practices and physicians, and detailed information about the policy being sold and its funding needs are gathered. Multiple life expectancy (LE) reports (vs only receiving one) should be obtained to estimate the lifespan of the insured. The shorter the LE, the higher the offers, so having multiple LE’s will ensure you have received the shortest LE.
- The Pricing Process: A package is sent to life settlement providers that includes the information that has been gathered. Providers will utilize internal proprietary spreadsheets and calculators to price the policy based on the life expectancy of the insured and the cost of funding the policy.
- Negotiation: In a typical life settlement sale, a broker, operating on behalf of the policy owner/seller, will facilitate several rounds of negotiations, a policy auction of increasing offers, until a final price is determined. Consider working with a financial advisor who is both Life Settlement Licensed and a Registered Representative with FINRA. FINRA rules offer more protections for the seller and only Registered Representatives can advise you on the sale of certain policies.
- Offer Acceptance and Contracting: Insist on a complete bid history to confirm offers (or declines to offer) from all buyers approved by the respective State Department of Financial Services/Insurance. This ensures that all buyers are included in the auction, and that the auction is as active as possible resulting in more bidding up to the highest possible offer. Once a price has been agreed upon, a contracting process ends with a closing conference and the delivery of the policy to the new policy owner. Insist on Gross and Net purchase offers to confirm fees and commissions, as fees and commissions paid to auctioneers and brokers can vary greatly.
- Contact After the Sale: Typically, contract language will allow the policy buyer to contact the insured periodically (usually quarterly) to update information, including secondary contacts.
While the life settlement industry could once be described as the “wild west,” today it is one of the most regulated financial sectors. If you are a trustee attempting to obtain the highest value for your client’s policy, it is best to work with a reputable broker who can act on your behalf. Insist on a bid history sheet showing the number of providers and the offers obtained, and that should become a part of your trust file. The price obtained can be significantly affected by the number of bidders competing for the policy.
Selling a trust-owned policy takes an entirely tax-free asset and potentially makes it taxable. How much would you pay in taxes if you sold a policy in your trust? We will cover that in our next blog entry.