Life Insurance Settlement Industry Creates Secondary Market.
Think of a world where buyers are ready and willing to purchase your vehicle at a price substantially more than its trade-in value and you can choose the highest bidder. No advertising, no bargaining, no expense to you. Fiction? Nope. Such a world exists,not for vehicles, but for life insurance policies intended for lapse or [...]
Think of a world where buyers are ready and willing to purchase your vehicle at a price substantially more than its trade-in value and you can choose the highest bidder. No advertising, no bargaining, no expense to you. Fiction? Nope. Such a world exists,not for vehicles, but for life insurance policies intended for lapse or surrender. These owners will receive a settlement before death.
The life settlement industry has given birth to a secondary market for buying and selling of life insurance policies from qualifying life insurance holders, who receive an offer guaranteed to exceed the current cash value of the policy. In 2002, life settlement providers paid about $340 million to buy policies with an aggregate cash value of $94 million.
Life Insurance Policyholders who qualify for life insurance settlements are generally older than sixty five years of age; have deteriorating health, but are not considered terminally ill; and have “ascertainable and limited” life expectancies between two and 15 years. Qualified policies are at least two years old, pay death benefits between $100,000 and $5 million and are issued by an “A” rated insurance company.
A CHANGING INDUSTRY
Relatively new, the life insurance settlement industry evolved from “viatical” settlements, which catered to the specific needs of terminally ill policyholders. Viatical life settlements enable an insured to receive benefits, before death, to pay for the high costs of medical care. Life settlements, also known as senior settlements, do not involve a terminally ill policy holder (less than 24-month life expectancy) but a determinable life expectancy based upon the insured’s age, health and lifestyle.
The life insurance policy’s fair market value is the present value of the death benefit, considering the policy’s duration and carrying costs. Other factors affecting the fair market value include the type of life policy, the policy’s cash value and any loans against the policy.
A life insurance settlement transaction creates a taxable event with two tiers. The first tier is the difference between the cost basis and cash value, most likely taxed as ordinary income. The second tier is the excess of life settlement proceeds over the surrender value.
The IRS has not provided any specific guidance yet, however, whether this money is considered to qualify as a long-term capital gain. The tax treatment of a viatical settlement is markedly different. The Internal Revenue Service considers these tax-exempt accelerated death benefits.
WHEN SHOULD I SELL OR BUY LIFE INSURANCE?
Life settlements are a great option when you can’t afford your premiums. Declines in interest rates on the short end have cut down the cash flow of seniors living on a fixed income. With life insurance settlements, premiums disappear and distressed policy holders receive cash up front.
Potentially the senior citizen has outlived all beneficiaries and the payout of life insurance would create a taxable estate. What if the senior citizen, due to health issues, doesn’t qualify for long-term care insurance. Life Insurance Settlement funds could be used to pay for long term health care.
From a financial perspective, life insurance settlements should be considered when a business is for sale or the owner is retiring. If your client is a non profit, or charity, it may be possible to consider selling donated life policies to realize cash and eliminate future premiums
Why do individuals want to buy life insurance policies? Many life insurance settlement providers are funded by big banks that view life insurance as an asset in a diversified investment portfolio. These financial conglomerates] rely on actuarial and other quantitative data to acquire a favorable life insurance policy that will produce a expected rate of return at maturity. These insurance policies are held in a blind trust that may be used as collateral for a bond offering in a process known as secondary market securitization.
POTENTIAL FIDUCIARY ISSUES
Life insurance products are acquired] for a host of reasons and should be a part of every estate and financial plan. As with any financial vehicle, these policies should be reviewed frequently. Usually they are not.
A good insurance policy at the time of purchase does not mean you have a good policy years later. In today’s low short term interest rate environment, many policies written in an environment when rates were substantially higher might require replacement?
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Debt Settlment gets a Bad Reputation?
Debt Settlement Companies continue to be targeted as a problem industry, a scam, or a fraud. They are easy targets in these tumultuous times, and for good reason. Many of these “Debt Settlement Companies” “Sell” Their service without full disclosure about the risks involved and many of them don’t educate their clients about all [...]
Debt Settlement Companies continue to be targeted as a problem industry, a scam, or a fraud. They are easy targets in these tumultuous times, and for good reason. Many of these “Debt Settlement Companies” “Sell” Their service without full disclosure about the risks involved and many of them don’t educate their clients about all of their options, including Debt Consolidation, Debt Management, Credit Counseling, and Bankruptcy.
The rise of the Debt Settlement industry is a result of other underlying issues including but not limited to, credit card companies, Lobbyist’s, bad Laws, lack of government regulation, and most importantly our CULTURE.
Clark Howard recently said “…when the bankruptcy laws changed in our nation. At that time, the giant banks that control the credit card portfolios stopped being cooperative with affiliates of the National Foundation for Credit Counseling (NFCC), which helps consumers manage and eliminate their debt. The banks were cynically trying to force people into a position where they had no choice other than to pay up. That environment created an opportunity for the debt-settlement firms to pop up with their false promises that they alone knew how to defeat the banks.”
We live in a capitalist economic system. The rise of Debt Settlement is directly related to the dire need for change in our Culture and specifically changes to the Credit Card Industry. Until Credit Card Companies are brought back into check the need for Consumer Debt Relief companies will always be there.
Debt Settlement
Debt settlement, also known as debt arbitration or debt negotiation, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full.
As long as consumers continue to make minimum monthly payments, creditors will not negotiate a reduced balance. However, when payments stop, balances continue to grow because of late fees and ongoing interest.
Consumers can arrange their own settlements by using advice found on web sites, hire a lawyer to act for them, or use debt settlement companies. Some settlement companies may charge a large fee up front; or take a monthly fee from customer bank accounts for their service, possibly reducing the incentive to settle with creditors quickly. One expert advises consumers to look for companies that charge only after a settlement is made, and charge about 20 percent of the amount by which the outstanding balance is reduced.
Debt Consolidation
Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.
Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.
Credit Counseling
Credit counseling (known in the United Kingdom as debt counseling) is a process offering education to consumers about how to avoid incurring debts that cannot be repaid. This process is actually more debt counseling than a function of credit education.
Credit counseling often involves negotiating with creditors to establish a debt management plan (DMP) for a consumer. A DMP may help the debtor repay his or her debt by working out a repayment plan with the creditor. DMPs, set up by credit counselors, usually offer reduced payments, fees and interest rates to the client. Credit counselors refer to the terms dictated by the creditors to determine payments or interest reductions offered to consumers in a debt management plan.
Source:
http://en.wikipedia.org/wiki/Debt_settlement
http://en.wikipedia.org/wiki/Debt_consolidation
http://en.wikipedia.org/wiki/Debt_counselling
http://edition.cnn.com/2009/LIVING/personal/06/04/clark.howard.debt.settlement/
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