Cashing Out of Business

Although life-settlement viability is determined on a caseby- case basis, with all transactions subject to relevant legal requirements and underwriting authorization, the general purchasing parameters are as follows:

• The insured is 65 or older.
• The policy’s death benefit is $250,000 or more.
• The policy has been in force at least two years.

Unlike applying for life insurance, no medical exams or extensive interviews are required. The underwriting process involves only paperwork, such as your life-insurance policy and in-force ledger as well as your medical records, which are necessary to verify the specifics of your insurance and health. Furthermore, there is no appraisal, application or processing fee.

Large portfolios of life policies are purchased by institutional investors seeking predictable non-market correlated returns based on the future value of policy proceeds. In 2006, corporate money managers invested $10 billion to $15 billion in life settlements—more money than in the previous seven years combined, because they are increasingly interested in purchasing pools of life policies to diversify their portfolios into alternative investments.

Imagine a world where you were only permitted to sell your house back to the builder, your automobile back to the dealer, and stocks back to the issuing corporation. This is what a world without secondary markets would look like, and this is the world life-insurance policyholders have traditionally encountered.

Before the emergence of the secondary life-insurance market in the late 1990s, the originating insurer was the only potential purchaser for your expendable business life-insurance contracts, thereby restricting policy disposition options to receiving an artificially low cash-redemption value. Because the insurance companies set the re-purchase price, policyholders traditionally received little economic value from their superfluous life contracts—on average, just 4 percent of the policy’s face value.

Fortunately, the life-settlement industry has replaced this monopsony (an anti-competitive market situation in which a seller is only permitted to sell to one buyer) with a free market alternative wherein companies competitively bid to acquire the rights and obligations in your dispensable business-life policies. This vibrant marketplace enables you to retrieve the fair market value from these otherwise illiquid business assets. With the average life-settlement payout today being 20 percent to 25 percent of the face value, a life settlement can be an effective tool for liberating substantial liquidity hidden within a dormant business asset.