LIFE SETTLEMENTS: From the AFP Exchange: A New Way to Free Up Cash ...life settlements have emerged as a new method to add value to your company’s balance sheet. ...financial professionals now have a new cash management resource: life settlements. This emerging resource improves liquidity and addresses cash management concerns through the sale of an existing life insurance policy for a lump sum of cash that’s less than the policy’s face amount — but more than the cash surrender value. Through a life settlement, a policyowner can realize value today from an asset that’s generally thought to have a benefit only when the insured passes away. ...
Traditionally, corporations and other business entities have viewed corporate-owned life insurance as an expense, albeit a necessary one, to manage the risk of a key executive’s death. When the need for coverage became unnecessary, it was an easy decision to cease the expense by surrendering the policy for its cash value or simply allowing it to lapse. With the advent of life settlements, however, turning an expense into a windfall profit becomes a new reality. Click here to see if the policy qualifies!
How Can Your Company Benefit? ... let’s examine a few scenarios in which life settlements could help:
• Your business is in a “cash crunch” and if it doesn’t raise money quickly it will fail. It’s not in a position to sell incomeproducing assets and equipment, but owns life insurance policies that qualify for a life settlement.
• A key employee leaves the business and coverage purchased to insure that person is no longer needed.
• The business is being sold and the need for coverage on the previous owner(s) is no longer relevant.
• The business fails and a resulting bankruptcy requires that assets be liquidated. Life insurance covering the owner(s) and/or key employees may have value during the liquidation.
• Life insurance policies were purchased to fund a buy-sell arrangement if an owner prematurely dies. Retirement or sale of the business might make the policies unnecessary.
• Merger and acquisition activity might cause the business to re-evaluate its need to carry life insurance coverage on certain individuals.
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CASE STUDY #1
Policy: $3 million term life
Cash Value: $0
Life Settlement: $930,000
A company took out a $3 million term life insurance policy to cover a business loan. The business owner (the insured) experienced an unexpected decline in his health. The business was sold and the loan subsequently repaid. There was no longer a need for the term policy. The life insurance policy was converted then sold through a life settlement, and the owner received $930,000.
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CASE STUDY #2
Policy: $15 million universal
Cash Value: $900,000
Life Settlement: $2 million
A Fortune 500 company carried life insurance in the amount of $15 million on its chief executive officer (CEO). Due to declining health, the CEO made plans to retire. As part of his retirement plan, his company gave him the choice of taking the policy and assuming the premium payment obligations or surrendering it for $900,000 in cash value. He was advised that for estate planning purposes, he should have survivorship insurance rather than an individual policy. Through a life settlement, he sold the life insurance policy for $2 million instead of the $900,000 he would have received had he surrendered it. ...
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When a mutually agreed upon price is determined for the life insurance policy, the company is paid a lump sum in cash. Ownership and beneficiary rights are transferred to the purchaser. All future premium payments are the responsibility of the purchaser and upon the death of the insured, the death benefit is payable to the purchaser. ... Your company can use the cash proceeds from the life settlement in any way — there aren’t any restrictions on use of the funds. ... Life settlements are a practical option to consider if your company desires to increase its liquidity or address other cash management issues. Use life settlements to generate a lump sum of cash and eliminate premium payment expenses.
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