Life settlements remain a niche asset class. It would allow seniors to pay for health care costs using tax-exempt proceeds from the sale of their life insurance. In 2020, the Senior Health Planning Account Act (HR 5958) was introduced in the U.S. Proceeds in excess of the surrender value are taxed as capital gains. įollowing the Tax Cuts and Jobs Act of 2017, proceeds up to the total amount of premiums paid over time are tax-free, and proceeds more than the tax basis up to the amount of the policy’s surrender value are taxed as ordinary income. In 2010, NCOIL adopted the Life Insurance Consumers Disclosure Model Act. In 2007, The NAIC and NAIC adopted revisions to the Viatical Settlements Model Act and the Life Settlements Model Act to strengthen consumer protections and address STOLI (stranger-originated life insurance) concerns. In 2005, the life settlement industry was regulated in 25 states, providing seniors more value than the cash surrender option. In 2001, "life settlements" became a common term to describe the purchase of life insurance policies from senior citizens. In 2000, the National Conference of Insurance Legislators (NCOIL) adopted the Life Settlements Model Act. The term viatical settlement refers to a life settlement where the life expectancy is under two years because the person was terminally ill. In 1993, the National Association of Insurance Commissioners (NAIC) adopted the first Viatical Settlement Model Act. Second, carriers now offer accelerated death benefit riders, which pay out if the insured is terminally ill, so there is no need for a settlement. First, the market size of terminally ill insured interested in selling their policies is small. Policies of terminally ill patients are rare for two key reasons. In its place arose a new strategy focusing on acquiring policies of the elderly, although a niche business persists to this day acquiring policies on terminally ill of all ages. However, by the mid-1990s, this investment strategy had faded away because of the rise of antiviral drugs. AIDS victims faced short life expectancies, high unanticipated expenses related to medical care, and selling a life insurance policy that they no longer needed as a way to pay these expenses made sense. 1980s - 1999 ĭespite the Supreme Court ruling, life settlements remained extremely uncommon due to lack of awareness from policy holders and lack of interest from potential investors. Justice Oliver Wendell Holmes noted in his opinion that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner may transfer without limitation. Unable to afford a premium payment and needing money for an operation, he assigned the policy to a doctor in exchange for 100 dollars. In Grigsby, John Burchard bought an insurance policy on his life. The case was argued in November 1911 and decided on December 4, 1911. 149 (1911) established and legitimized the life insurance industry, ruling that policy as private property, which may be assigned at the will of the owner. Policyowners are generally 65 or older and own a life insurance policy worth $100,000 or more. Most commonly, universal life insurance policies are sold. Term, permanent, or whole life insurance policies qualify for life settlement. After the transaction has closed, there are no future premium obligations In a retained death benefit transaction, policyowners receive cash payments and their beneficiaries also receive a payment after the insured dies. On average, the policyowner receives three to five times more than the surrender value for the policy. The primary reason the policyowner sells is because they can no longer afford the ongoing premiums, they no longer need or want the policy, to fund long-term care, increased medical costs, or they need money for other expenses. The investor assumes the financial responsibility for ongoing premiums and receives the death benefit when the insured dies. Life settlement of a life insurance contractĪ life settlement is the legal sale of an existing life insurance policy (typically of seniors) for more than its cash surrender value, but less than its net death benefit, to a third party investor.
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