life settlement power point

Life SettlementsLife Settlements

For Training Purposes OnlyFor Training Purposes Only

What is a Life Settlement?What is a Life Settlement?

A Life Settlement is simply the sale of an existing life A Life Settlement is simply the sale of an existing life insurance policy that is no longer affordable, wanted insurance policy that is no longer affordable, wanted or needed.or needed.

The seller sells their ownership and beneficiary The seller sells their ownership and beneficiary rights to the policy for a cash payment.rights to the policy for a cash payment.

The investor buys the policy at a discount and holds The investor buys the policy at a discount and holds it until maturity and receives the full face value. it until maturity and receives the full face value. Therefore, one is always buying low and selling high.Therefore, one is always buying low and selling high.

How long have Life Settlements How long have Life Settlements been around?been around?

In 1911 the Supreme Court ruled in In 1911 the Supreme Court ruled in Grigsby Vs Grigsby Vs Russell Russell thatthat insuranceinsurance policies are legally viewed as policies are legally viewed as financial assets which may be sold to a third party, financial assets which may be sold to a third party, just as any other tangible investment can be sold at just as any other tangible investment can be sold at the owner's discretion.the owner's discretion.

Institutional Life Settlements – since 1911Institutional Life Settlements – since 1911

Retail Life Settlements - since 1997Retail Life Settlements - since 1997

Are Life Settlements Safe?Are Life Settlements Safe?

A general reserve life insurance company typically A general reserve life insurance company typically has about $1.04 in reserve for every dollar issued in has about $1.04 in reserve for every dollar issued in life insurance. In addition, insurance companies are life insurance. In addition, insurance companies are required in each state to contribute to a reserve state required in each state to contribute to a reserve state fund. There has never been a failure to pay a fund. There has never been a failure to pay a legitimate policy of a general reserve life insurance legitimate policy of a general reserve life insurance company in American history….. company in American history….. NEVERNEVER! !


People buy life insurance for a variety of reasons.People buy life insurance for a variety of reasons.

Life insurance is simply a financial tool. Most of us Life insurance is simply a financial tool. Most of us buy life insurance to protect our families in case of buy life insurance to protect our families in case of our early demise and the future loss of income.our early demise and the future loss of income.

We all need this type of life insurance to protect our We all need this type of life insurance to protect our families.families.


People also buy life insurance for other reasons.People also buy life insurance for other reasons.

Life insurance is often purchased on the life of a Life insurance is often purchased on the life of a business owner to protect the bank or others from business owner to protect the bank or others from loss in case of the death of that person. This is loss in case of the death of that person. This is called called Key-Person InsuranceKey-Person Insurance..

Key-Person insurance is taken out to protect a Key-Person insurance is taken out to protect a particular person or business, for a particular period particular person or business, for a particular period of time.of time.


People also buy life insurance to cover their estate People also buy life insurance to cover their estate during a period of illiquidity.during a period of illiquidity.

If a wealthy individual were to die early and leave an If a wealthy individual were to die early and leave an estate with large estate taxes due, their heirs might estate with large estate taxes due, their heirs might have to sell family assets to pay those estate taxes.have to sell family assets to pay those estate taxes.

These people buy large insurance policies to pay These people buy large insurance policies to pay these taxes in the event of their early demise. This is these taxes in the event of their early demise. This is not insurance to protect their family from loss of not insurance to protect their family from loss of income, but protection from estate taxes.income, but protection from estate taxes.


Business policies and estate planning policies are Business policies and estate planning policies are part of what we call part of what we call special usespecial use policies. policies.

96% of these 96% of these special usespecial use policies lapse within 8 policies lapse within 8 years, and no death benefit is ever paid by the years, and no death benefit is ever paid by the insurance company. This creates trillions of dollars insurance company. This creates trillions of dollars of of free cash flowfree cash flow for insurance companies. for insurance companies.

The New York Times:The New York Times:

““Last year, for instance, insurance companies Last year, for instance, insurance companies reduced their financial exposure by $1.1 trillion when reduced their financial exposure by $1.1 trillion when 19.8 million policyholders stopped paying premiums, 19.8 million policyholders stopped paying premiums, according to the Insurance Information Institute. In according to the Insurance Information Institute. In comparison, the industry paid death benefits on only comparison, the industry paid death benefits on only 2.2 million policies.”2.2 million policies.”-Charles Duhigg, “Late in Life, Finding a Bonanza in Charles Duhigg, “Late in Life, Finding a Bonanza in Life Insurance” Life Insurance” -December 17, 2006December 17, 2006


Consider what happens when business owners and Consider what happens when business owners and wealthy individuals don’t need or want their wealthy individuals don’t need or want their insurance policies anymore?insurance policies anymore?

What if they sell their businesses or their estates What if they sell their businesses or their estates become liquid, or they determine that they can no become liquid, or they determine that they can no longer afford the premiums?longer afford the premiums?

What are their options?What are their options?


Most insurance companies would tell these Most insurance companies would tell these policyholders that they have 3 options:policyholders that they have 3 options:

•They can take the cash value and cancel their They can take the cash value and cancel their policy.policy.

•They can take a “paid-up” policy for a much They can take a “paid-up” policy for a much lesser amount.lesser amount.

•Or, they can let the cash value pay the premiums Or, they can let the cash value pay the premiums for a period of time and then let the policy lapse.for a period of time and then let the policy lapse.


These 3 options are very good for the insurance These 3 options are very good for the insurance company.company.

Why?Why?

Because they save the insurance company billions Because they save the insurance company billions of dollars each year, by ensuring that they don’t ever of dollars each year, by ensuring that they don’t ever have to pay the death benefit.have to pay the death benefit.


But…what they don’t tell the policyholders is that But…what they don’t tell the policyholders is that they have a fourth option: they could sell their they have a fourth option: they could sell their insurance policy to an investor for its insurance policy to an investor for its fair market fair market valuevalue..

The fair market value is whatever someone is willing The fair market value is whatever someone is willing to pay for the policy on the secondary market. On to pay for the policy on the secondary market. On average a Life Settlement will pay the insured 3 to 4 average a Life Settlement will pay the insured 3 to 4 times the cash value of the policy.times the cash value of the policy.

This is called a Life Settlement! It is turning a This is called a Life Settlement! It is turning a death death benefitbenefit into a into a living benefitliving benefit!!

Why have you not heard about Life Why have you not heard about Life Settlement Investments?Settlement Investments?

Life Settlements are still Life Settlements are still uncommon knowledgeuncommon knowledge to to most people. Even the majority of those in the most people. Even the majority of those in the financial services industry are still ignorant of this financial services industry are still ignorant of this asset. asset.

Insurance companies don’t want you to know about Insurance companies don’t want you to know about Life Settlements. It costs them billions of dollars Life Settlements. It costs them billions of dollars each year. each year.


However, many insurance companies are buying However, many insurance companies are buying large blocks of Life Settlement policies issued from large blocks of Life Settlement policies issued from other companies as other companies as hedge fundshedge funds. They invest in Life . They invest in Life Settlements, but they do not want you to.Settlements, but they do not want you to.


This is not a security, so your stock broker most This is not a security, so your stock broker most likely does not sell it, and most of the private money likely does not sell it, and most of the private money invested in Life Settlements comes from an invested in Life Settlements comes from an investor’s poorly performing stock and bond investor’s poorly performing stock and bond portfolios. If a broker cannot sell it, he probably will portfolios. If a broker cannot sell it, he probably will not recommend it.not recommend it.


Institutions would rather buy these high-yield assets, Institutions would rather buy these high-yield assets, re-package them and sell them to you in the form of re-package them and sell them to you in the form of a private investment vehicle like CDs, annuities, a private investment vehicle like CDs, annuities, bonds, etc.bonds, etc.

If you’ll notice, banks, insurance companies and If you’ll notice, banks, insurance companies and financial institutions don’t buy CDs and annuities – financial institutions don’t buy CDs and annuities – they sell them.they sell them.

Warren Buffet is investing billions of dollars in Life Warren Buffet is investing billions of dollars in Life Settlements.Settlements.

Life Settlements are now considered a Life Settlements are now considered a valuable financial planning tool valuable financial planning tool

Recognized by:Recognized by:

USA TodayUSA Today Wharton School of BusinessWharton School of BusinessWall Street JournalWall Street Journal AARPAARPKiplinger’sKiplinger’s American Cancer SocietyAmerican Cancer SocietyBloombergBloomberg Time MagazineTime MagazineMSNBCMSNBC Business WeekBusiness WeekDatelineDateline The EconomistThe Economist60 Minutes60 Minutes Motley FoolMotley Fool

American Institute of CPAsAmerican Institute of CPAs


A Multi-Billion $$$ Industry

Major financial publications continue to attest to the growth of the industry.

“We expect the Life Settlement business, an emerging secondary market for life insurance, will grow more than ten-fold to $160 Billion over the next several years.”

Sanford C. Bernstein, Research Call

Their pursuit of this market is related to the degree of protection and the avoidance of market and economic risk.

The Return of their Principal and Return on their Principal are contractual obligations of highly rated insurance companies and are not subject to any market or economic considerations.

Big Industry, Big Investors

Why?

Wall Street Says…

Safety and Security-Contractual Agreements with A rated or better Legal Reserve Life Insurance Companies

-Uncorrelated to stock market, oil prices, interest rates or even terrorism

Mainstream-Institutional Due Diligence

-Opportunity to invest on level playing field with institutions

No Management Fees-All fees are included in acquisition cost

-Qualified funds (IRAs) have a custodial fee

Liquidity-Medium to long term investment

-A sit and hold type investment

Performance-Absolute Payout

-Historical double-digit returns

Clear Exit Strategy-Forces you out on top – you always buy low and sell high!

-Vast majority of all investors reinvest

Win/Win Investment-Insured receives > cash value

-Investor receives > solid returns

What makes LS an ideal investment for many?

Absolute ReturnsAbsolute Returns

Bloomberg says Life Settlements are the Bloomberg says Life Settlements are the onlyonly asset which can truly be said to provide asset which can truly be said to provide absolute absolute returnsreturns. They are not correlated to any traded . They are not correlated to any traded market – whether stock, bond, currency or market – whether stock, bond, currency or commodity markets – nor to political or economic commodity markets – nor to political or economic upheaval. Once invested the only variable upheaval. Once invested the only variable affecting a Fund’s return is the life expectancy of affecting a Fund’s return is the life expectancy of the policies held. the policies held.

Investing with Life SettlementsInvesting with Life Settlements

Now the average accredited investor can invest in Now the average accredited investor can invest in the Life Settlement market that has typically only the Life Settlement market that has typically only been available to institutional investors like banks, been available to institutional investors like banks, hedge funds and Warren Buffett, because of hedge funds and Warren Buffett, because of fractionalizingfractionalizing..

What is What is fractionalizingfractionalizing policies? policies?

Fractionalizing is the practice of selling small Fractionalizing is the practice of selling small fractions or percentages of a large policy. Many of fractions or percentages of a large policy. Many of the the special usespecial use policies on the market are $5 Million policies on the market are $5 Million face amount and higher. Until now, the average face amount and higher. Until now, the average individual investor could not participate in buying individual investor could not participate in buying policies of that size. policies of that size.

Now they can because they can buy a small fraction Now they can because they can buy a small fraction or percentage of the policy. or percentage of the policy.

How the process works…How the process works…

Each transaction should Each transaction should ALWAYSALWAYS be processed be processed through a Trust Company.through a Trust Company.

The Trust Company acts similar to a Title Company in a real The Trust Company acts similar to a Title Company in a real estate transaction. They make sure everything is processed estate transaction. They make sure everything is processed properly. They also manage IRA accounts, send out properly. They also manage IRA accounts, send out quarterly reports to clients and annual reports to the IRS.quarterly reports to clients and annual reports to the IRS.


Nothing is perfect, and Life Settlements are no Nothing is perfect, and Life Settlements are no exception. exception.

1. It is not a liquid investment. 1. It is not a liquid investment. You should not put any money in Life Settlements that you You should not put any money in Life Settlements that you might need before the policy matures. might need before the policy matures.

2. There is the possibility of a premium call.2. There is the possibility of a premium call.

Life SettlementLife Settlement

One can purchase fractions of multiple Life One can purchase fractions of multiple Life Settlement policies to reduce the risk of a premium Settlement policies to reduce the risk of a premium call. We know that some will mature early and some call. We know that some will mature early and some will mature on time, and some will go past LE. The will mature on time, and some will go past LE. The early maturities will pay a premium rebate which can early maturities will pay a premium rebate which can be held to cover any possible premium calls for be held to cover any possible premium calls for policies that might mature late.policies that might mature late.

Example Portfolio…Example Portfolio…S. Moldow S. Moldow John Hancock Life John Hancock LifeLE: 2-4 yearsLE: 2-4 years Date: 12/21/2006Date: 12/21/2006

Face: $ 5,000,000.00Face: $ 5,000,000.00Acquisition Cost: $ 3,100.000.00Acquisition Cost: $ 3,100.000.00 Placed: $ 13,000.00 .42% OwnedPlaced: $ 13,000.00 .42% OwnedProjected Return: $ 20,967.75Projected Return: $ 20,967.75

This policy matured in only 18 months for this owner! This policy matured in only 18 months for this owner! The client received a check for $20,000.00. She left The client received a check for $20,000.00. She left $967.75 in her money market account for liquidity. She $967.75 in her money market account for liquidity. She also left her premium rebate of $2,505.67 in her money also left her premium rebate of $2,505.67 in her money market account. Her return on this policy was about 60% market account. Her return on this policy was about 60% annualized. annualized.

What is Life Expectancy (LE)?What is Life Expectancy (LE)?

Life Expectancy (LE) is the key factor in Life Expectancy (LE) is the key factor in determining the value of a policy. The shorter the determining the value of a policy. The shorter the LE, the more value the policy has.LE, the more value the policy has.

There are 5 or 6 companies who are experts at There are 5 or 6 companies who are experts at determining life expectancy (LE) which are utilized determining life expectancy (LE) which are utilized in the purchase of these policies. They have a high in the purchase of these policies. They have a high degree of accuracy in predicting life expectancy. degree of accuracy in predicting life expectancy.

Rule of 72Rule of 72

InvestmentInvestment Initial Initial Historical Rate # of years Historical Rate # of years Amount after Amount after VehicleVehicle Investment of Return to Double 30 Years____ Investment of Return to Double 30 Years____

Bank CDBank CD $100K$100K 4% 4% 24 $266,666 24 $266,666

Mutual FundMutual Fund $100K 6% 12 $450,000$100K 6% 12 $450,000 Indexed AnnuitiesIndexed Annuities $100K 9% 8 $950,000$100K 9% 8 $950,000

Life SettlementLife Settlement $100K 12% 6$100K 12% 6 $3,200,000$3,200,000

If you earned $100K per year, it would take you 30 years to earn $3,000,000.00If you earned $100K per year, it would take you 30 years to earn $3,000,000.00

Let’s analyze a Life Settlement policy…Let’s analyze a Life Settlement policy…

Policy InformationPolicy Information Investment InformationInvestment InformationFace Amount: Face Amount: $2,000,000.00$2,000,000.00 Amount to be invested: Amount to be invested: $10,000.00$10,000.00Acquisition Cost: Acquisition Cost: $1,000,000.00$1,000,000.00 Percent of Ownership in this Policy: Percent of Ownership in this Policy: 1.0%1.0%Policy Issue Date: Policy Issue Date: 7/19/20037/19/2003 Payout at Maturity: Payout at Maturity: $20,000.00$20,000.00Number of Escrow Years: Number of Escrow Years: 5 5 Investment Multiplier: Investment Multiplier: 2.02.0Amount Being Escrowed: Amount Being Escrowed: $222,500.00$222,500.00 Predetermined Gross Profit: Predetermined Gross Profit: $10,000.00$10,000.00Life Expectancy: Life Expectancy: 3 to 53 to 5 years years Gross Yield at Year 5 Maturity: Gross Yield at Year 5 Maturity: 100%100%Annual Premiums: Annual Premiums: $44,500.00$44,500.00 Annualized ROI at Year 5 Maturity: Annualized ROI at Year 5 Maturity: 20%20%

If PolicyIf Policy ApproximateApproximate Premium CallPremium Call Gross Payout Gross Payout Net Payout Annualized Net Payout Annualized Matures in: Premium Return Due That Year Yield_____Matures in: Premium Return Due That Year Yield_____Year 1Year 1 $1,711.54$1,711.54 $0.00 $0.00 $20,000.00 $21,711.54 117% $20,000.00 $21,711.54 117%Year 2Year 2 $1,283.65$1,283.65 $0.00 $20,000.00 $21,283.65 56% $0.00 $20,000.00 $21,283.65 56%Year 3Year 3 $ 855.77$ 855.77 $0.00 $20,000.00 $20,855.77 36% $0.00 $20,000.00 $20,855.77 36%Year 4Year 4 $ 427.88$ 427.88 $0.00 $20,000.00 $20,427.88 26% $0.00 $20,000.00 $20,427.88 26%Year 5Year 5 $ 0.00 $0.00 $ 0.00 $0.00 $20,000.00 $20,000.00 20% $20,000.00 $20,000.00 20%Year 6 $ 0.00 $427.88Year 6 $ 0.00 $427.88 $20,000.00 $19,572.12 16% $20,000.00 $19,572.12 16%Year 7Year 7 $ 0.00 $427.88 $ 0.00 $427.88 $20,000.00 $19,144.24 13% $20,000.00 $19,144.24 13%Year 8Year 8 $ 0.00 $427.88 $ 0.00 $427.88 $20,000.00 $18,716.36 11% $20,000.00 $18,716.36 11%Year 9Year 9 $ 0.00 $427.88 $ 0.00 $427.88 $20,000.00 $18,288.48 9.2% $20,000.00 $18,288.48 9.2% Year 10Year 10 $ 0.00 $ 0.00 $427.88 $20,000.00 $17,860.60 7.8% $427.88 $20,000.00 $17,860.60 7.8%


You can do You can do Cash investments Cash investments

401K rollovers401K rollovers

Traditional IRAsTraditional IRAs

Roth IRAsRoth IRAs

96% of Life Settlement investors re-invest in 96% of Life Settlement investors re-invest in Life Settlements when their policy matures.Life Settlements when their policy matures.

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