Source: The SunAmerica Retirement Re-Set Study, July 2011 and Financial Planning News. Results based on an April 2011 Harris Interactive survey of 1,001 Americans over age 55. The importance of "guarantees over volatility" as shown in the results of this study are consistent with the Baby Boomer study which I wrote about earlier this month.
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Buyers of life contingent structured settlement payment rights face exposure to mortality risk that can be mitigated with life insurance. One of our readers raises some interesting questions about mortality exposure which I will attempt to answer in this informative post.
She writes "Apparently folks like myself who buy life contingent payment rights also receive a life insurance policy on the original annuitant to protect their investment in addition to the policy for rights to those payments.If the original annuitant dies before payments are due to start, then the buyer receives the life insurance proceeds instead of the life contingent payments.
If the original annuitant commits suicide within the first year (what I've been told), the entire investment is lost (no life insurance and no life contingent payments)."
Her questions...
Question: Is suicide a concern for losing the investment only within the first year after payment rights transfer?
Comment:
The suicide clause in a life insurance contract is designed to prevent people who are contemplating taking their own lives from obtaining life insurance. It is considered to be contrary to public interest to encourage suicide by making insurance proceeds available to those who see no way out of their financial difficulties
To accomplish this, the life insurance suicide clause states that if the insured commits suicide within a specified period of time, the policy will automatically be voided. Generally the length of time is 1 to 2 years and the contract provision applies whether regardless of the sanity of the insured at the time of the act.
Once the suicide exclusion period of time has elapsed, the insurance company must pay the claim even if the insured commits suicide. However, if suicide occurs while the time limit is still in effect, the company will usually only refund any premiums that the policy-owner has paid for the coverage. Accrued interest on the premiums typically won't be refunded, as the company will use it to offset part of its costs in initially setting up the policy.
Questions: A. How does one keep track of the living status of the original annuitant for the next couple decades if payments aren't scheduled to start for least 20 years? B. How does one learn if the original annuitant died even if they own a life insurance policy on that annuitant?
Most of the life insurers issuing structured settlements use an electronic version of the "Social Security Death Master" database (neither Darth Vader, nor the Key Master of Gozer are involved) to cross reference against their policy records. A more basic version of the Social Security death records can be found here
The reader's question is very timely because there have recently been allegations that life insurers aren't doing enough to find and pay beneficiaries after an insured dies. At issue is an accusation that life insurers are using the Social Security Administration's Death Master File — an account of all Americans who die — to stop annuity payments, but not to track down and pay beneficiaries of life insurance policies. A task force of industry regulators is working with the National Association of Insurance Commissioners ("NAIC") to draft a Model law and procedures. It will then be up to each state to decide if additional regulations are necessary.
Question: if the original annuitant dies (not of suicide during the first year) would the proceeds of the entire life insurance policy be tax-free to the owner/beneficiary?
A. As stated in IRC 101(a)(1) General rule
IRC 101(a)(2) Transfer for valuable consideration
(B) if such transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer".
C. Furthermore, if there is a delay in paying death benefits generally life insurers will pay interest from the date of death tio the date of settlement of the life insurance claim. The interest is taxable.
Question: What if the life insurance company insuring the annuitant goes under - can I just get another life insurance policy for the annuitant somewhere else without great effort?
That will likely depend on:
Question: Why is life insurance on the original annuitant even needed?
Even if the state court process changes the direct ownership of structured settlement payment rights to the buyer, without life insurance on the "original annuitant", the purchaser of life contingent structured settlement payment rights, with no periodic certain would bear the full mortality risk and could lose everything.
About the author: John Darer sells a wide variety of life insurance products as solutions to help mitigate financial risk exposures of individuals, families and businesses. As a Chartered Life Underwriter and Chartered Financial Consultant with over 28 years in the life insurance business, he has an extensive body of knowledge and concomitant network of contacts to place, or attempt to place your toughest cases.
Other Resources:
Life Insurance in the settlement planning process
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A question befitting the late "Archibald Bunker" has come across my desk today. "If i feel like i was a benefictionary (sic) on a life insurance claim but have not heard from the insurance company what do i need to do" Download
If the insured is still living, you will not be able to receive this information, unless the insured has given written authorization that the life insurer can release this information to you. If an insured has died, the beneficiary must contact the life insurance company and file a claim for the insurance money. If you are a valid beneficiary the insurer will need to confirm your identity.
Alot of life insurance goes unclaimed. Calling it a "conservative" estimate, Florida Insurance Commissioner Kevin McCarty said 40 of the largest U.S. life insurance companies may owe policy beneficiaries more than $1 billion, according to a May 19, 2011 article in MSN/Money.
If a beneficiary cannot be found the property is subject to being escheated, which is the forfeit of all property (including bank accounts) to the state treasury if it appears certain that there are no heirs, descendants or named beneficiaries to take the property upon the death of the last known owner.
Life insurers generally use the Death Master File, a Social Security Administration list of those who have died, but that has come under investigation is some parts. Usually it's the beneficiary's obligation to find the insurance company after an insured person dies. But that could change now that regulators are aware that some insurers may have used the Death Master File to figure out when to stop paying on annuities, but not when to make payouts to life insurance beneficiaries.
If you have a life insurance it is important to keep the life insurance policy or policies in safe place (but not in a safe deposit box!), so that your loved ones will not have to rummage through your papers at a time of grief.
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If you want to buy life insurance, the oft required medical exams can be a pain in the butt. First you have to schedule them, then you have to get stuck with a needle so they can draw blood and you may need to pee in a cup. And if you need more insurance some time later you might need to do it all over again. Well "relief" is at hand.
Some life insurance companies have underwriting programs that help facilitate your being able to buy more insurance without a medical exam/ This may be possible provided you have been fully undewritten for other life insurance within the last 5 years. The amount of insurance varies depending on the recency of the last policy applied for. And the previous policy DOES NOT need to be from the company with these simplified underwriting requirements.
One life insurance company will issue up to $1,000,000 without an exam if you have been fully underwitten within the past year. Up to $500,000 can be issued from the same life insurer if you have been fully underwitten within the last 5 years.
The underwriting requires an express application and among other things you will be required to provide evidence of a cover page or declarations page from the previously issued policy. Note that it is not a guaranteed issue program. It is a simplified issue program.
Life insurance can be an important solution as part of the settlement planning process. For more information Life Insurance in the Settlement Planning Process or call John Darer at 888-325-8640
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The word on the street is that a specialty finance company was close to being brought to its knees due to a major cash call to pay life insurance premiums on acquired life insurance policies and needed a lifeline.
Life settlement companies acquire interests in life insurance policies from people (or businesses) who no longer need life insurance, people (or businesses) who have life insurance but are in serious need of cash and willing to sacrifice financial security for for their families or businesses in the hereafter for something now (albeit reduced). A number of life settlement companies are also involved in structured settlement factoring as a companion line of business.
When structured settlement payment rights are acquired as part of a structured settlement factoring transaction, its basically a one and done. Money is paid to acquire the rights and one simply has to rely on a life insurer (or in some cases a payment servicing company) to make the payments.
With life settlements, the purchaser of the life insurance payment rights has the additional responsibility of making premium payments, possibly for as long as the insured life lives. Prices are set based on an assumed life expectancy and an acceptable profit margin to the buyer based on the assumed life expectancy.
As we all know people are living longer and it's possible that projections may be off. I hate to sound macabre but the hurt to the buyer comes several years down the road when the accumulation of premiums from those having lived longer than expected results in a potentially devastating cash call to the life settlement purchaser.
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National average credit card rates are approaching 15% and those with bad credit could end up with a rate close to 60%, according to an article published in CNN Money on January 28, 2011. New rules put in place under the CARD Act limit fess and preventing banks from raising rates retroactively so they make this up by charging more up front.
The increase in credit card rates make structured settlement transfers, life settlement transactions and life insurance policy loans more attractive.
Alternate sources of cash include borrowing on cash value life insurance. If you bought cash value life insurance a while ago, are in your 40s, 50s or 60s or 50s (assuming you have consistently paid premiums) you may have a fixed interest rate loan provision. The fixed rate will likely be far less than credit card rates. Newer policies may have a floating rate loan provision that still may be more favorable than credit card rates.
Benefits of life insurance loans: (1) No need for an application like a traditional bank loan or a new credit card, or court approval like a structured settlement payment factoring transaction and, if you are the policy owner, you can usually get your cash in less than a week; (2) no points, origination fees or closing costs (3) Although it makes sense to do so, you do not need to pay back the loan during your lifetime as long as you can afford to pay the interest. The loan becomes a set off against the death benefit when the claim is settled after your death. A life insurance loan is essentially an advance on your death benefit and is treated favorably for tax purposes. There is a limit to what you can borrow that is typically an aggregate of about 90% of the total policy cash value.
The downside of life insurance loans is (1)that you are reducing your life insurance benefit to the extent of the outstanding loan principal plus any unpaid accrued interest. It's important to assess the impact on your family's future needs before proceeding; (2) you must have enough cash flow to at least pay the loan interest to keep the policy in force. If the policy lapses it may trigger a taxable event, if the amount of cash plus money loaned out exceeds what you have paid in premium over the years. It is worth getting an in force ledger from your life insurance company to see the impact of the loan under different repayment scenarios, or just simply paying the interest; (3) Withdrawals from a Universal Life policy bring an added risk to extent that mortality, expense and investment returns in the policy are not guaranteed. Consider a life insurance loan if the debt you wish to pay down or pay off carries a higher interest rate than the rate charged on the life insurance loan.
For some people who cannot handle the carrying costs of a loan, or seniors who have no future need for life insurance, a life settlement may be appropriate. Ultimately a life settlement is possible because an investor (or group of investors) is willing to gamble on your life expectancy. The highest prices are available for the sick and elderly for obvious reasons.
For some people, selling structured settlement payment rights may be appropriate. Both life settlements and selling structured settlement payments come at a cost of trading a secure future cash flow for a reduced amount of cash. In the case of structured settlement factoring transactions (structured settlement transfer), the cash received is income tax free. The latter requires the approval of a Court to go through, after a hearing to determine whether the transaction is in your best interest as well as the best interest of your dependents. I've extensively covered the pitfalls of selling structured settlements on this blog for the last 5 plus years.
If you are seeking alternate financing and your options include disturbing a financial plan or product already in place, it is advisable to work with an experienced credentialed financial professional who can ask the right questions and explore your options with you. Band aids eventually have to be changed and a solutions which deals with a short term need in the context of a long term plan is sensible.
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New York's Court of Appeals recently issued a ruling that legalized Stranger Owned Life Insurance transactions.
In a 5-2 decision issued by the New York Court of Appeals on November 17, 2010, the majority ruled against Alice Kramer, widow of Arthur Kramer, a prominent New York lawyer who died in 2008, and held that New York State's insurable interest law is not violated when an insured takes out an insurance policy with an intent to have the policy resold to investors. The Court further concluded that in order for Alice Kramer to continue her claim against the investors for the insurance that her children had sold, she would have to prove that Arthur Kramer was subject to coercion or other nefarious conduct from the investors in the insurance policies.
NSSTA member Michael J. Miller, a partner with Philadelphia's Drinker Biddle law firm, represented Lincoln Life and Annuity, one of the life insurers.
Judge Carmen Beauchamps Ciprarick wrote the decision. To review a copy of the decision Download Kramer STOLI NY CT Appeals Decision 11-10-2010
Despite the adverse ruling, the American Council of Life Insurers stated it will continue its work to get states to adopt regulations to deter STOLI. At the present time 29 states have such regulations.
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Two behemoths of the structured settlement industry disagree on offering ancillary products other than structured settlement annuities, at least according to their websites.
A. One company fervently states that "there is no interest in selling the plaintiff any other type of financial product, before, during or after the case is settled".
B. As a market differentiator, another company recently stated it has a relationship with a national wholesaler of life insurance services and proudly proclaims that its structured settlement consultants are now included among the wholesaler's 3,000 associates. As an aside this author understands that the relationship is non exclusive and that any licensed insurance agent or broker can access the same wholesaler through the wholesaler's independent insurance agent distribution channel.
As someone who has been offering a considerable range of solutions to risks that can be solved through life insurance, disability insurance, long term care insurance and other financial planning services for over 27 years, to help my clients solve a wide variety of personal and business planning needs, I'm pleased to see some in the industry move in the direction of more comprehensive solutions. For us it's business as usual.
A sampling of 4structures Insurance Services
As a life insurance expert, I offer the credentials of Chartered Life Underwriter and Chartered Financial Consultant, to go along with extensive practical experience, to go along with my settlement planning credentials (Registered Settlement Planner and Certified Structured Settlement Consultant). What is a CLU? Download CLU-promotional-brochure What is a ChFC? Download ChFC-promotional-brochure
During the last 27 years I (and other life insurance experts like me in the industry) have built up an extensive network of contacts and outlets which give value to clients as an independent consultantnot tied to an Independent Marketing Organization (IMO) help desk. An IMO help desk provides simplicity for those that do not have experience in the area and may provide some convenience to those who do. It is worth noting that IMO arrangement also helps the parent company aggregate production credits across its entities for higher commissions and residuals. There's nothing wrong with that but since one of the behemoths in question has chosen to use the differentiator, shouldn't we call a spade a spade?
If structured settlements were simply about placing a product would there be any need for trained, exerienced and/or credentialed experts? Surely the same goes for life insurance , long term care and other insurance.
Above image source: Wikipedia
For more information
1.Life Insurance in Settlement Planning and life insurance generally
2. John Darer's February 2010 video...
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Almost 50% of Americans between the ages 45-70 have no financial plans in place to protect themselves against outliving their assets and the rising cost of healthcare should they live longer than they expected, according to a new survey released today by the Society of Actuaries (SOA). Additional findings show more than one-third are worried about running out of money during retirement, but only 20 percent plan to purchase an annuity or other form of guaranteed lifetime income to protect their assets.
Plaintiffs, claimants and attorneys should not fail to consider a balanced approach and plan for longevity risk as well as other exposures such as disability, long term care, the loss of income and physical support of a spouse due to death or diability. Those who avoid even considering structured settlements, annuities, life insurance, disability insurance, healthcare financing methods such as Healthcare Savings Accounts (HSA), or long term care insurance could be left holding the bag. For example, if you are parents of a child with a profound disability, as part of your overall financial planning, be sure to account for your own needs with your own resources, in addition to considering the needs of the child.
We can help. Call us toll-free 888-325-8640. via structuredsettlements.typepad.com
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If you smoke anything other than cigarettes you may now be able to qualify for "Standard Plus" non smoker rates on term life insurance, universal life, whole life or other form of permanent insurance.
OK
Probably not OK!
So if you chew tobacco, wear a nicotine patch, chew nicorette gum, smoke pipes (see above) smoke cigars with the boys on the golf course AND you need life insurance or wish to explore the benefits of life insurance in a structured attorney fee product arbitrage...
Contact John D. Darer, CLU ChFC CSSC RSP for details. 888-325-8640
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