We helped this client reduce annual life insurance expenses by over 60%, keep their coverage…all at no cost to them.

We have a long term client who purchased a $1M survivorship life insurance policy in 2000 from a highly rated carrier. Several years later they took out a loan for $75,000 to help with college tuition for their 3 children.

The annual premiums are currently $6,088 and loan interest payments are $5,900 totaling an annual payment of $11,988. The loan has grown to $80,000 reducing the death benefit to $920,000. This policy had become overly expensive and a life settlement was an idea but we had a much better solution for them.

Both insured have maintained their preferred health status so we proposed a replacement not a life settlement via a 1035-tax free exchange to an alternate highly rated carrier with these results. This would not only allow them to keep life insurance protection but eliminate the $80,000 loan.

We rolled the cash surrender values net of the loan balance to a new $1M Survivorship policy with annual premiums of $3,912. The family is out from under the growing loan, restored their full $1M benefit and reduced the annual outlay from $11,988 to $3,912 for a policy that will carry to well beyond the youngest insured’s age 100.

The surrendering carrier will send a 1099-R to the insured’s for the value released above the cost basis which in this case is approximately $10,000 of ordinary income. But considering all, the client is very happy and will still save a ton of money beginning in year 1.
The moral of this story is regularly review your life insurance situation a far better deal may well be out there.

In working with investors we are regularly asked to review portfolios. Buying life settlements requires extensive due diligence but often when you are first presented with a portfolio you can spot some red flags. Now these red flags don’t mean that you have a bad portfolio or that you should go running for the hills. Quite the contrary in my opinion if you are expert enough in your ability to do the due diligence required this might be exactly where you will find the best deals. But this is definitely an area of life settlement investing to keep your wits about you.

We were asked to help a client recently and as normal the first look at this $500M portfolio was a spreadsheet.

Red Flag 1: Who owns the portfolio? And more importantly are you talking to them directly? The fact is that spreadsheets are passed around this industry like dinner rolls. Long broker chains will kill any chance of a deal.

Red Flag 2: All policies are 2-3 years old. That means this is likely a BI portfolio or financed, so buyer beware of STOLI.

Red Flag 3: These recently issued at Preferred rates and new LE’s are now all short. Sure declines in health happen but if you are looking at a few dozen policies with that fact pattern in the same portfolio statistics would say something is awry.

Red Flag 4: Lots of insurance on single lives. It goes without saying that concentrating in relatively few lives is a risky proposition. But also when one portfolio has been assembled this way it should call into question the sellers motives and caliber of origination.

Red Flag 5: The Brooklyn specials. The simple fact is that there has been a good deal of questionable inventory originated in the NE area and a concentration from there is cause to increase scrutiny.

There are plenty of life settlement portfolios that have one or all of these flags. If you have the ability to do the due diligence necessary it could be a great opportunity to pick up some very discounted life settlement inventory.

Red Flag 4:

If you have a large taxable estate and are uninsurable then you have probably have concerns. First you will be leving your heirs with potentially a substantial tax burden. Second, the government not you is deciding where your hard earned estate is going to benefit. Typically, life insurance would be used to mitigate this tax issue but if you are uninsurable then you will need to be more creative in your solutions.

One approach is to use an inter-generational split dollar agreement. This is a special structure set up with your heirs which allows you to transfer (or loan) a potentially large sum out of your estate to fund life insurance on your children. The taxable value of the split dollar entity to your estate will be a very large discount to the amount funded into it. For taxation purposes the capital paid in to the split dollar is paying for a benefit far in the future. The IRS calculates the net present value of that benefit, discounting for the time-value of money resulting in a substantial tax benefit.

This strategy is an effective way to reduce the estate taxes and transfer wealth to your heirs. It does not offer the level of mitigation that life insurance can but is an effective tool for high net worth seniors who do not have life insurance as an option. This approach is suitable for elderly seniors with an estate in excess of $5 million and a desire to leave the estate to their heirs.