This post is part of our series for advisors to pass to their clients. Life settlements can be complex, but finding the right person to advocate on your behalf can make things that much easier. We here at Ashar Group want to help you provide the resources that policy sellers need to flourish in this chapter of their life.
The life settlement and life insurance industries are full of terms like “alloc split,” “per stirpes,” and “rescission period”—terms that, unless you really enjoy industry jargon, you probably have no reason to understand.
Now, the mark of any good businessperson who works with the general public—a financial planner, for example—is the ability to communicate clearly, without using unnecessary or confusing terminology. But with that said, there are a few terms that anyone considering a life settlement should know. We’ve listed some of the most important ones below.
Accelerated Death Benefit: This is a benefit, or rider, that can be attached to a life insurance policy. It allows the policyholder to receive cash advances against the death benefit in the occasion that the policyholder is diagnosed with a terminal illness.
Accelerated Benefit or Living Benefit: These are death benefits that can be paid to the policy owner while the insured is still living.
Appraisal or Bid: An offer to buy a life insurance policy. When you and your advisor enter into the life settlement process with Ashar, your policy is not appraised until we do a Secondary Market Valuation® (SMV®) on your policy, to establish Fair Market Value (see below for our definition of the SMV).
Cash Surrender Value: The amount your policy is worth if you decide to voluntarily terminate it. This amount is determined by the value of the insurance premium paid up to the date of termination, minus surrender charges charged by the insurance company. Typically, the cash value is low in relation to the amount the policy is worth. A life settlement can be a way to receive more for a policy that you no longer want or need.
Escrow: A third-party account where funds received from a life settlement are held after the settlement has been finalized, but before the insurance company has completed the ownership and beneficiary change. If you sell your policy in a life settlement, your lump sum will sit in escrow for a short period of time before being released to you.
Key Man or Key person Policy: This is a life insurance policy specifically for businesses, designed to protect the business against financial loss caused by the death of a vital member of the company (someone with trade secret, technical, or other knowledge). These policies can also qualify for a life settlement solution.
Long Term Care: Medical and/or non-skilled care that helps meet the health and daily needs of the elderly or those with chronic illness. Many people who decide to sell their life insurance policies on the Secondary Market do so in order to fund long term care for themselves or a spouse.
Secondary Market: A secondary market is one in which investors purchase assets or securities from other investors, instead of from the original issuing companies. The Secondary Market for life insurance policies operates similarly (see an overview here), with investors purchasing policies directly from sellers—working with the assistance of financial advisors and brokers.
Secondary Market Valuation - SMV®: This is the process that Ashar uses to determine the Fair Market Value of a life insurance policy. It consists of five steps: a strategic interview, a policy filter to assess the strengths and weaknesses of the asset, a comprehensive medical review, pricing analysis, and finally an internal assumption challenge, which is a kind of peer-review critique of each valuation.
Life Settlement: A life settlement is the sale of a life insurance policy to a third party for a value in excess of the policy’s cash surrender value, butless than it’s face value (death benefit).
Rescission Period: A designated period of time, usually around 15 days, during which a policy seller can rescind a life settlement transaction. These periods are dictated by state law, and so may differ from state to state.
We hope this glossary of life settlement terms helps you understand the life settlement process, and make an educated decision about whether one is right for you. If you think a life settlement is a good choice for you, take our quick policy quiz to see if your policy qualifies. Then ask your advisor to get in touch with Ashar Group at 800-384-8080. We’d love to help get you started.