Life settlements can be excellent tools for individuals who need to unload life insurance policies that have become costly and burdensome - but they’re not the only ones who can benefit from this Secondary Market Solution.
Businesses and nonprofits may also have circumstances in which a life settlement may be a prudent choice. Here’s a look at two situations in which this could be the case.
Although key man or key person insurance isn’t as popular today as it was 20 years ago, there are still businesses that hold this sort of life insurance policy.
Basically, key man insurance is a life insurance policy that the business takes out on a person who is seen as fundamentally important to the business: the founder, a CEO or CFO, etc. If that person passes away, the business is likely to suffer in many ways, including financially. Key man insurance is designed to help get the business through that time.
The problem is, employees - even top-level executives - are no longer spending their entire careers at a single company as much as they used to. What happens if this person on whom the company has taken out a policy leaves? Or what if the person gradually become less important to the business than they originally were, as the business grows, brings in more executives, etc.? The company is then stuck paying costly premiums for the remainder of the insured’s life.
Often, businesses are counseled to simply surrender the policies, which means losing a huge amount of the cash that the business paid into the policy. Another option, however, is a life settlement. In this transaction, a business would work with its financial counselor, who in turn would work with a life settlement broker like Ashar to sell the policy on the Secondary Market.
The broker would shop the policy to various institutional investors in order to get the best possible offer. This can be many, many times more than the cash surrender value.
Take this case study of one of Ashar’s clients, for example: when a key executive retired from the company he helped create, he had a $5,000,000 term convertible to Universal Life insurance policy. The cash value was $0, but the business was still considering lapsing the policy. Instead of doing that, Ashar was able to secure a price of $1,200,000 that was then included in the executive’s retirement package.
Of course, each individual business decides what to do with these funds - they belong to the policy owner, and are delivered as a lump sum payment.
Life settlements can also serve a purpose for nonprofits that have gifts of life insurance policies from donors.
While in many situations, keeping the policy and paying the premiums can make sense, sometimes a policy can be put toward a more useful end by being liquidated. Think of a capital campaign, for example, or a sudden, extended downturn in charitable giving like the one that happened during the Great Recession. Or perhaps the premiums have become too costly, as they have for many people now that life insurance premiums are being raised.
In these cases, turning a donated life insurance policy into cash can be a great jump-start for an organization. Many simply surrender the policy in order to collect the immediate cash value, but that can potentially mean that a whole lot of money is left on the table.
To sell their policy on the Secondary Market, a nonprofit would go through the same process as a business selling its key man insurance (although in most if not all cases, the group would want to ensure that the policy donor was amenable to this idea).
The organization would work through a financial counselor and a life settlement broker, who would secure the highest possible price for the policy. After the transaction was finalized, the nonprofit would then receive the lump sum payment. The payment has no strings attached, so the organization could use that money however it saw fit: as seed funding for a major gifts campaign, to cover a lean financial time, or to help fund a rainy day fund, etc.
Although life settlements are most often used by individuals who want to better fund their retirement or pay for long term care, this solution can also be highly useful to businesses and nonprofits. If you have an institutional client that you think might benefit from a life settlement, you can start the ball rolling by taking our quick Policy Value Quiz to see if the policy would qualify.