Life Settlements CWPP™ Educational Module Copyright 2006 he Wealth Preservation Institute 378 River Run Dr. St. Joseph, MI 49085 269-408-1841 ntroduction The concept behind Life Settlements is fairly simple Life Settlements are for someone who purchased a life insurance policy in the past, no longer needs tha particular policy, and would like to sell the policy today for cash and use the proceeds for any numbe of different purposes. Typically the seller is over the age of 65 (70 is better). For the life settlement to be financially viable for the seller, the seller must receive more than the “cash surrender value” (CSV) of the policy. Why should advisors learn LS? One key issue for advisors (especially CPAs, accountants, EAs, trust officers and attorneys) is that of fiduciary duties. Most advisors act in a fiduciary role to protect the client and have a duty to offer the best advice possible to a client. If you do not know this topic, you will not be able to give the best advice possible to your senior clients A mistake when giving advice on this topic could cost your clients hundreds of thousands of dollars. Those that are licensed can also use this topic as Why sell a life insurance policy? A better question is why should clients keep life insurance policies they have no need for. Which begs the question: Why and when should someone buy a life insurance policy? 1) To protect the family in case the “breadwinner” (paren who makes the most money) dies. 2) To pay for estate taxes so wealth can be passed to the heirs at the second spouse’s death. 3) To help offset expenses associated with replacing a ke executive of a corporation. Advisor must determine if the original need for the life What type of LI policy can be sold? The simple answer is that any “individual” LI policy can be sold through a life settlement. This includes: – term; whole life; universal life; variable; survivorship; adjustable; and joint first-to-die policies. The DB should be at least $100,000. The client should be over 65 and it is best is there has been a negative change in health. Also, it is typically required that the policy be in forc for at least two years and that the client is expected to live for at least two years. Further, the purchaser would ideally like to see a Why would a client sell a LI policy? 1) When Clients have insurance and/or estate needs that have changed, which makes their current policy(s) inadequate or excessive for their current or future needs. – Estate size shrunk – Beneficiary predeceased – Pay off a loan that no longer exists 2) When premiums on the policy are no longer affordable. Continued 3) When clients are not satisfied with the performance of the insurance product(s) they have chosen, or are aware of newer, better performing insurance products. – If a client can get more from a LS than surrender it makes sense to sell vs. surrender. 4) When clients choose to realize the value of their policy(s) now, rather than continuing to pay on a policy from which they will never receive benefits. – Clients decides that they no longer want to fund a DB and want to reap any benefits from the policy today. Continued 5) When clients wish to live out the remaining years of life without a change in lifestyle. – This is the classic situation where the client has been paying on a policy for 20+ years and is now in retirement. The client may or may not have an estate tax problem, but has had a life style change. – The client does not have enough money to live the accustomed lifestyle until the presumed date of death. 6) When clients need capital to pay for medical treatments or procedures. Statistics about LS The U.S. Census Bureau, 2003 reported that 35.9 million individuals age 65 and over own a life insurance policy. Already, the face value of policies sold in Life Settlement transactions amounts to more than $2 billion. The life-settlement industry is growing at an annua rate of just under 20%. This market is only going to increase as the baby boomers start to reach age 65 and beyond. Who is involved in Life Settlements? 1) The Policyholder (our client) – Viator: means the owner of a life insurance policy 2) A Life Settlement Broker – Viatical Settlement Broker: means a person that on behalf of a viator and for a fee, commission or other valuable consideration offers or attempts to negotiate viatical settlement contracts between a viator and one or more viatical settlement providers. 3) The Provider (the purchaser) Tax Considerations Unlike viatical settlements, the proceeds from a Life Settlement may be taxable depending on the cost basis o the policy, the CSV and the amount received from the Life Settlement. If the settlement amount is less than the cost basis, there should not be a tax liability. Any monies received in excess of the amount invested and up to the cash surrender value is considered profit and may be taxed as ordinary income. Proceeds in excess of cash surrender value are considered to be capital gains, depending upon the particular situation. Example sume a $1,000,000 Policy issued 10 years o and a $400,000 Settlement Amount Paid Policy Owner $225,000 Taxed as Long Term Capital Gain $25,000 Taxed as Ordinary Income (because the CSV is $25,000 over the basis $175,000 CSV (Tax Basis Plus Earnings) $150,000 Tax Basis (i.e. premiums paid) Example Dr. Smith, age 65, wife 65, married 3 children 6 grandchildren. Total taxable estate of $6,000,000. This includes a $2,000,000 life policy (UL) with a $250,000 CSV NOT owned by an ILIT. The annual premiums are $20,000 a year. Dr. Smith decides to sell his LI policy and buy a new one inside the ILIT (this time the policy will be a second to die. The new premium for the same $2,000,000 DB is $15,000 a year. Continued What are the tax consequences? If we assume Dr. Smith paid premiums for 10 years, h basis would be $200,000. NO tax on the first $200,000 (because it is a return of the basis). The CVS is $250,000 so income taxes would be paid on the $50,000 difference between CSV and the basis The remainder ($100,00) would be taxed as capital gains. Client received $315,000 after tax (vs $250,000 CSV) Plus the client saved $5,000 a year on the new premium of a policy that would be owned by an ILIT. More Examples Term Conversion Dr. Smith's 20-year term policy was reaching its conversio deadline. He is now 79 and was recently diagnosed with coronary artery disease. He cannot afford to convert the policy and letting his $250,000 policy lapse would leave him nothing. He applied to a Life Settlement company and his policy was sold for $75,000. He was able to recover all of the premiums he had paid into the policy, plus a nice profit. He could then use the money to pay bills, go play golf on Examples Unplanned Health Change Roger was 76 and had just suffered a stroke, which left hi permanently disabled. His family was unprepared for this. After learning of the Medicaid requirements and the cost o a care facility, the family was unsure how they were going to pay for his care. Fortunately, his CWPP™ advisor suggested that Roger look into a Life Settlement on his $500,000 LI policy. Roger decided to sell the policy for a $250,000 settlemen and eliminated the future premium payments on that polic These funds covered the three years Roger lived in a nursing home facility before dying. The remaining cash w distributed to Roger’s original beneficiaries. Examples Key-Man A company owns a $5 million dollar policy on an older executive who had retired 3 years earlier. The surrender value was $600,000. The company no longer wished to make the $90,000 per year premium payments, the company was considering surrendering the policy for its cash surrender value (CSV). The company was offered $1,000,000 for the sale of the policy and netted $950,000 after taxes, almost doubling the cash surrender value. Life Settlements w/out a broker Are you tired of getting hit on by LS brokers? It seems to be all the rage. Understand that if you have the contacts, you DO NOT need a broker to facilitate a LS. Brokers can negotiate with a LS company a “commission” of approximately 6% of the death benefit of the policy purchased. If a client’s LI policy has a DB of $1,000,000, the commission on the table for the broker is $60,000. Brokers typically do not disclose this number to the adviso and instead tell the advisor approximately how much the advisor will make on each case. CWPP approved Broker While it is always financially beneficial for advisors to broker their own LS’s. I know many do not have the time. CWPP™ advisors are already successful and by adding LS to the topics they deal with will help them provide better advice and make more money BUT, LS will not be a core business. Therefore I had to go find a broker I could approve for use for CWPP™ advisors. Continued Brokers in general are greedy in my opinion. Most want the agent to do most of the work and then do not pass on a fair share of the commission. The broker The WPI recommends has the same philosophy as The WPI. What’s that? How about getting paid for what you do. Continued If you want to do a lot of work when working up a LS, then our approved broker will pay you more money. If you want to do less work you will get paid less money. What happens is you do not want to do any work? No problem, the LS broker recommended by The WPI will do ALL of the work for you and still send you a referral fee. Marketing One of the biggest issues with any topic is marketing. CWPP advisors can use articles and powerpoints of The WPI. The approved Broker also has powerpoint and marketing material and much more. Ghost web-site The approved broker has a ghost web-site. This site has all sorts of information about LSs for clients to read and determine if a LS is something they need to look at further. It has only your information on it and the specific LS broker approved by the Institute (Jeff Kaufman). The site can be setup so clients go there and can ask for information and help Jeff will get in contact with them and will sell them if it makes sense on a life settlement. Continued So, you can send your clients to the web-site. They can get excited about LSs. They can ask for info that Jeff will get to them. If they want to move forward Jeff will get them the information and illustrations and work up the case. If the case goes through Jeff’s firm will then send you a referral fee. What a wonderful sales approach for agents who don’t have time to work up a LS case. More information For more information on how you can work with the approved LS Broker (Jeff Kaufman) and his company, please e-mail info@thewpi.org. Summary on Life Settlements As the American public ages, the LS industry will continue to grow. Right now the topic is not well known or understood by most advisors. By getting up to speed on the topic, you will be able to give the best advice possible to senior clients and fulfill your fiduciary duties for those clients. Plus, if you can form relationships to write LS directly you could save your clients thousands of Overview for the Professional Designation: CWPP™ (Certified Wealth Preservation Planner) he Wealth Preservation Institute 378 River Run Dr. St. Joseph, MI 49085 269-408-1841 2 What do Advisors want? To earn more money? To have more knowledge than other advisors? To provide better advice to clients on multiple topics? To be more credible than other advisors? A team of advisors for support and back office when dealing with “advanced” planning. The ability to market to CPA, Attorneys and physicians through continuing education credit. Are these of interest to you? – If so you are a candidate to become an APP™ or The WPI and CWPP™/APP™ What is the Wealth Preservation Institute (WPI)? – The only educational entity in the country devoted to provide education on “advanced” planning (asset protection, tax and estate planning) – The only entity in the country focusing on topics that apply mainly to the high income/net worth client. – Certifying entity for the CWPP™ designation. The CWPP™ course is a 24 hour certification program which can be taken all online or in person. The Asset Protection Planner designation is for those simply want to deal with AP (12 hours). Marketing The WPI helps is certified advisors market in two several very unique ways. 1) The ability to become an instant author through a 340+ page “ghost book.” You can read the table of contents at http://www.thewpi.org/newindex.php?dept=51&pid=495 The WPI will allow CWPP™ advisors to give CPE continuing education courses on a local level to CPAs and accountants. The WPI has a number of articles that CWPP™ adviso can use to place in local medical, accounting, legal and other business journals. Topics What topics are covered in the CWPP™ course? Asset protection (3 hours) -Domestic -Offshore Deferred Compensation (4 hours) -WealthBuilder® Annuity; Traditional NQDC and the Leveraged Bonus Plan® -Qualified plans/412(i) plans -ESOPs -IRAs Business Planning (6 hours) -Account Receivables (A/R) Leveraging -VEBAs and 419A(f)(6) Plans -Section 79 Plans -Closely Held Insurance Companies Continued Estate Planning (8 hours) -Basic -“Advanced” - Life Insurance -Premium Financed Life Insurance - Medicaid Planning -Qualified Pension Insurance Partnership® (Mitigating the 75% Tax Trap) -Charitable planning -Long Term Care Insurance Personal Finance (4 hours) -Annuities -Life Settlements -Reverse Mortgages Next Seminar? The next in person seminar is in Vegas on June 57, 2006. The course can be taken completely online. Check the CWPP™ web-site www.thewpi.org for posting of when the next in person seminar will take place. Group discounts. If you have 5 or more advisors who want to take the course, please contact The WPI for information on course discounts. Questions? www.thewpi.org info@thewpi.org 269-408-1841