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Life Settlements

Life Settlements. The Answer to Many Financial Issues. History of Life Settlements. Early uses of settlements Viatical Settlements of the 1980s. Applications for Life Settlements. Buy/Sell Agreements Key Man coverage Estate Tax Issues Look back Family needs changes

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Life Settlements

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  1. Life Settlements The Answer to Many Financial Issues

  2. History of Life Settlements • Early uses of settlements • Viatical Settlements of the 1980s

  3. Applications for Life Settlements • Buy/Sell Agreements • Key Man coverage • Estate Tax Issues • Look back • Family needs changes • Under-performing Policies

  4. Suitability Parameters • Age requirement: • Generally, investors in life insurance will look for policies where the insured is 75 or older. However, if there is a shortened mortality due to health younger ages can be considered. • Minimum contract face amount: • The usual minimum face amount is $1,000,000. • Change in health since issue: • Any decline in health since the policy was issued will be a major factor in determining what investors will offer for the policy.

  5. Before Settlement Death Benefit $1,150,000 Premium $45,000 Annually to Age 95 Surrender Value $48,000 Cash Settlement $300,000 Proceeds disbursed to the trust for other business purposes Case Profile 1Cash Settlement Used for New Investment Male age 82 with standard health historyPolicy owned by a trustNo longer needed for Estate Tax purposes

  6. Before Settlement Coverage Amount $750,000 Surrender Value $23,374 Cash Settlement $265,000 Proceeds used to purchase the long term care policy she needed Case Profile 2Life Settlement Used to Fund Long Term Care Female, age 83, with deceased spouse, held joint survivorship insurance policy. She needed an affordable Long Term Care policy

  7. Before Settlement Death Benefit $3,535,000 Premium $100,000 Surrender Value $445,000 Cash Settlement $1,100,000 Settlement was used to purchase a single premium annuity for life. Annuity payments were used to fund a new $2,000,000 policy Case Profile 3Life Settlement Provides Wealth Management Male, age 84 with rated health history, maintained two life policies for estate planning purposes. Annual policy review revealed client needed only $2,000,000

  8. Case Profile 4 Closely held corporation. Two brothers owned most of the outstanding shares. One brother was in “fair” health and one brother was uninsurable. There was a need for an additional $1.2 Million in insurance coverage. The only way to purchase coverage that offered any prospect of insurance on the uninsurable brother was to purchase a Survivorship (2nd to Die) policy. In the event that the healthy brother would die first there would be sufficient coverage to meet the Buy Sell Agreement obligations.

  9. Case Profile 4 cont. The “uninsurable” brother was the first to die. The corporation was $1.2 Million short of the needed cash. At the time the policy had cash surrender value of $285,000. The corporation would have needed to borrow roughly $900,000 or provide installment payments in that amount. A life settlement produced $360,000. This provided a savings of $75,000 to the corporation in meeting its obligations.

  10. Case Profile 5 Female Aged 87. Legally incapacitated from Dementia. Her husband died leaving a $2.3 Million Survivorship policy in Trust. The contributions had been “skinny” at $115,000 per year. With the husband gone the large income that paid the premium was now also gone. An “in-force” illustration from the carrier revealed that the policy, if the $115,000 continued to be paid, would lapse in five years. Who’ll die first? The widow or the insurance policy?

  11. Case Profile 5 cont. At Guaranteed rates the required premium would have been $360,000 per year!!!! Should the estate deplete its assets to fund a premium in trust? At the time of the husband’s death the cash surrender value of the policy was $670,000. A life settlement was made by the trustees which brought $785,000 into the trust principal. The trustees now had cash assets to invest and produce income and available principal for the guardians to provide are for the widow in her golden years.

  12. Income Tax Effects • Basis in contract being sold • Cash value in contract • Life Settlement realized • Calculations for Ordinary Income vs Capital Gains

  13. LIFE SETTLEMENTSThe Secondary Marketplace Alan Jay Ackerman Attorney-at-Law 2 Penn Plaza Suite 1500 New York, NY 10121 TOLL FREE: 1-888-AJA-LAWS Email: ackerman@ajaestate.com Two Penn Center Plaza 1500 JFK Boulevard Suite 200 Philadelphia, PA 19102-1706

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