Pletschet: Life insurance policies source of income

Household money managers are looking for more sources of cash in these troubled times and Sunday I covered their opportunity to take cash out of a home equity via a reverse mortgage. That process may be somewhat familiar to cash-hungry savers, but today let me delve briefly into a lesser-known money
reservoir -- selling off a life insurance policy that you don't think you will need.

Called the life-settlement business, it has institutional investors, such as hedge funds, purchasing life insurance policies from policy-holders, and paying the premiums to keep the policies in force. It's a source of cash for older Americans seeking money for medical care and other retirement needs.

Michael Hanley, head of Walnut Creek-based MPH Asset Management, who guides clients through the complex process, calls a life-settlement ``a marvelous opportunity for policy-holders who no longer need the insurance.''

If you are age 70 or older, have a life expectancy of at least two years, but less than 10, own a policy with a face amount of $250,000 or more issued at standard or better rates, have a term policy within the convertible period, then you have a policy with a good market value, according to Hanley. If you fall into these requirements, a life settlement will provide more value than what is available under a cash surrender, Hanley adds.

The commonly-held idea that the policy value is gone is not true, Hanley says. Life settlements remain a very valuable option for those who no longer need their policy and who cannot afford the on-going premiums and need the cash now.

The process of valuing a policy and completing the sale is tedious and takes about 90 days and 120 days in some cases.

The many steps include gathering all medical records, which takes about 30 days, and then sending them to two independent actuarial firms for life expectancy calculations, needing another 14 days. Then it's necessary to obtain verification of coverage along with various assumptions from your life-insurance carrier, and then send all this information to 35 or more possible purchasers, both domestic and international.

Hanley says that his office then selects the three highest offers and negotiates an increase, if possible, and then submits the offer to the client. If the client approves, then the process moves forward and legal documents are drawn by the provider firm and change forms requested from the client's carrier. If the client does not approve the deal, it ends right there.

Hanley says his company is compensated by a fee arrangement so that doesn't affect the amount of money going to the policy-holder.

The adjustment by the life expectancy companies has caused the purchase prices paid for policies to be less in some cases by up to 30 percent from previous purchases, according to Hanley.

``Underwriting has tightened up but I believe for the good of the over all market. Is there money available? You bet!'' says Hanley.

Buyers of policies benefit because the assets are unaffected by stock-market fluctuations. ``They are guaranteed to pay off,'' Hanley says.

While life settlements are not a household name, the value of the transactions involved totaled $12.2 billion in 2007, a figure that had tripled over three years, according to Conning Research & Consulting in Hartford, Conn. Rapid growth should continue, getting a boost from an increasing number of Baby Boomers who retire, looking to supplement retirement savings and Social Security benefits.

But in the world of life settlements, good news can be bad, according to the San Francisco Business Times. Specifically, since people are living longer and healthier lives, those institutions purchasing policies have to pay more premiums and wait longer for the death benefits to be paid.

Actuarial tables created by 21 First Services in Minneapolis, for example, recently boosted the life expectancy of men over age 65 by 20 percent and of women over 65 by 15 percent. Longer life expectancies often result in smaller payouts for those selling their life insurance policies.

There are tax implications to life settlements. While heirs receiving life insurance proceeds pay no income tax on the money received, those selling policies are subject to taxation. Sellers should consult their tax accountant.

Hanley says that strong candidates for life settlements are policyholders between 70 and 86 who have at least $1 million in coverage. Hanley can be reached at 1-925-944-0800.

Many people hold onto life insurance as a security blanket. But if you have no needy heirs waiting to assume your assets and liabilities, there's no need for life-insurance coverage.

Cliff Pletschet's Personal Finance column appears Sunday and Monday. Send general-interest questions to him at P.O. Box 28147, Oakland, CA 94604 or e-mail him at cliffpletschet@sbcglobal.net Give your name, city and the question in brief form. To subscribe to his quarterly newsletter, Investment Educator, send $20, made out to Personal Investment Education, to the above address. Also, visit our Web site, www.investment-educator.com .