Remember, the seller is not restricted in the use of proceeds. There may be tax implications. Always seek the advice of legal counsel and your tax advisor before electing Life Settlement.

The most common circumstances triggering the sale of a life insurance policy via Life Settlement are:

Business Conditions:

Buy/sell agreements – If one or more of the parties to the buy/sell agreement leaves the business or the business is sold, the policy previously purchased to finance the sale may no longer serve its intended purpose.
Key man – Change of ownership, executive retirement, or business success may negate the need for a COLI policy. At present, nearly a third of the Life Settlement market involves key man policy sales.
Executive benefits – A COLI policy originally purchased to fund a split-dollar or a deferred compensation benefits program may no longer be needed because an executive has retired, the benefits plan has been changed, or the corporation’s financial statement management objectives have changed. Or perhaps the life insurance policies that fund a compensation plan don’t perform as expected. Maintenance of the underperforming policies may impose a financial strain on an organization’s cash flow and jeopardize its ability to fulfill financial obligations.
Business bankruptcy - COLI policies are not exempt from bankruptcy proceedings.

Also, sale of a policy via Life Settlement should be considered to generate the cash necessary to purchase an interest in another company, facilitate transfer of a family business to the next generation, repay business debt, or repurchase stock from a shareholder.

Tax Conditions:

Estate tax needs change as estate size changes –

1. Market value of taxable estate may have seriously eroded due to poor investment performance, or
2. Estate liquidity may have greatly increased due to superior investment performance, or
3. Large estate tax credits are in place or anticipated and may exceed the estate tax liability, or
4. Gifting/charitable bequests sufficiently reduce the need for insurance.

3-year ‘look-back’ – Insurance may be needed for estate planning purposes but the transfer of an existing policy (subject to estate taxes) into a trust triggers a 3-year ‘look-back’ and perhaps additional estate tax liability. It may be more tax efficient to fund the trust with a new policy.

Personal financial conditions or other personal circumstances change personal objectives:

• Insured outlives the intended heirs/beneficiaries
• Insured desires to distribute funds to heirs while alive or not at all
• Insured desires to utilize liquidated funds
• Insured desires to purchase a more efficient life insurance policy or long term care policy
• Insured desires to invest in a more suitable investment vehicle (i.e. retirement home)
• Insured desires to pay-down debt
• Insured desires to improve quality of senior life
• Policy maintenance is unaffordable
  
  Divorce – Life insurance policy value (even a term policy) should be considered a marital asset. If underperformance puts the policy in jeopardy and coverage is still necessary, Life Settlement and policy replacement might be in order. If coverage is not needed, then the Life Settlement value (not the cash surrender value) should be a distributable asset.

Policy Conditions:

Under-performing insurance contracts individually owned, trust owned, or held in a tax qualified retirement plan – If originally illustrated earnings and expense projections were too optimistic, additional unanticipated premium payments may be required. This is most often found in older or thinly funded non-guaranteed death benefit policies. Funds may be unavailable or increased premium payments may be unadvisable. Consequently, if a policy lapse notice is received or an actuarially certified policy evaluation estimates lapse before the insured life expectancy, then Life Settlement should be considered. Life Settlement offers fair market value providing cash available for exchange to a new ‘no lapse guarantee’ death benefit product or for a more suitable, alternate investment. Clearly this is a better option than lapse for no return on premium investment or paltry cash surrender value.

Other:

Charitable Foundations solicit donations of life insurance policies for the death benefit to be derived. 1) If a charity receives a policy and holds it for the death benefit, it must pay ongoing premiums. The charity doesn't get the cash surrender value to cover, for instance, operating expenses. 2) If the charity immediately sells the donated policy, it has the cash it needs to manage operating expenses or make other investments but the donor derives no added benefit other than recognition for his/her benevolence. Had the donor sold the policy via Life Settlement before gifting it to the charity, there would be a higher cash donation available to the charity and a higher tax deduction for the donor.

Charity may be holding a previously gifted policy, which is approaching lapse without value. The charity can dip into operating cash to pay the unanticipated premiums or it can sell the policy via Life Settlement, again, for more than the cash surrender value.