Life Settlements Product Overview

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1 Life Settlements Product Overview Leveraging Life Settlements in Writing New Business

2 Contents What is a Life Settlement? Case study Options for unwanted policies Who buys these policies? How does it work? History of Life Settlements Industry statistics Market Demographics and drivers Definitions and distinctions Valuation of a policy for settlement Licensing and regulation Candidates for Life Settlements Getting started Rescission period A Breed Apart

3 What is a Life Settlement A life settlement is generally defined as the purchase of a life insurance policy for a lump sum that is greater than the policy s cash surrender value, but less than its face value (death benefit). Life Settlements refer to insurance policies held by seniors - a man or woman age 65 or older. A life settlement is simply another option available to the insured when he or she finds that they no longer need, want, or are able to afford a policy. Life settlements have become a significant emerging asset class and market issuance of Life Settlement asset based bonds totaled an estimated $23 billion by year-end 2005, a rise from $13 billion in 2004, according to research by Sanford C. Bernstein LLC, New York.

4 Case Study Mr. Smith is a 78-year old male The policy - $1,000,000 Face Value UL Cash Surrender Value - $40,000 Settlement amount/ cash received by Mr. Smith, $210,000 Mr. Smiths premiums had become unaffordable on his fixed retirement income. In addition to this, Mr. Smith had taken out the policy years ago to safeguard the financial well-being of his wife who had since died. His main concern was now investing part of the proceeds of his settlement into long term care insurance. Quite simply, because Mr. Smiths life expectancy at age 78 was different than what the insurance company had originally factored into his policy, he was able to realize greater value on the secondary market for his unneeded policy; essentially arbitraging its value today against when the policy was issued.

5 Options for unwanted policies Cash Values for the three options available to a policy owner in the case of Voluntary Termination Lapse Complete and total forfeit of policy, once all cash value has been depleted by using the policy s accumulated cash in order to make premium payments until coverage of the insured is canceled. Surrender Selling the policy back to the issuing insurance carrier for an amount predetermined and represented as the Cash Surrender Value (CSV). (values may differ, life settlements are particularly attractive for those policies which have a depleted CSV) Life Settlement A life settlement offers increased value to the insured, where not long ago none was thought to exist. This diagram illustrates a scenario wherein the life settlement value has exceeded the CSV. This equation is paramount in considering a life settlement Over other options such as cash surrender of the policy.

6 How does it Work? When a policy is purchased, the dynamic between the policy holder, now the Institutional Investor, stays very much the same as it was before the purchase in as far as the contractual obligation between the policy owner and the issuing insurance carrier. The seller collects a lump sum in excess of the policy s cash value and of course is no longer responsible for premium payments. The buyer has now taken over the contract which should bare a large payout in the future. The insurance carrier keeps the policy in force and continues to collect premiums from the new policy owner. Nominal life insurance dynamic Policy Owner Premiums Death Benefit Insurance Carrier Life settlement dynamic Policy Owner Policy Cash Settlement Institutional Investor Premiums Insurance Carrier Future Benefit

7 Who buys these policies? In a life settlement the purchase of a policy by an institutional investor is normally used to diversify their investment portfolios. This has led to the emergence of a relatively new asset class in the bond market. This market is dominated by banking and investment institutions such: JP Morgan Chase, Credit Suisse Securities, Goldman Sachs, Deutsche Bank Securities Berkshire Hathaway, etc. etc. Policies are often bundled into hedge funds by institutional investors and pension funds to diversify risk. Bond issuance in this asset class has risen to an estimated $23 billion in the US and Europe for 2005 according to research by Sanford C. Bernstein LLC. Recent estimates by the New York Times indicate that the industry will grow to reach $150 billion per annum in bond issuance based on face value in the next few years.

8 Industry statistics Majority of policy owners either lapse or surrender their policies (National Underwriter Magazine, September 2004) Approximately $100 billion annually in lapses (65+ demographic alone) (Derived from 1.2 trillion annual lapse rate as estimated by ACLI Life Insurance Fact Book ) It is estimated that 88% of Universal Life in-force never results in a death benefit and that 40% of all issued life insurance policies lapse at some point. Only 1% of Term policies result in death claim (Jim Connolly, National Health and Financial Services, 2004) 76% of seniors polled owned life insurance in 2005, 64% of seniors polled owned life insurance in 2006; (Senior Market Advisor Survey 2005 and 2006) This12% delta between 2005 and 2006 is not representative of death claims paid to seniors, which were in the single digits. (Lawrence B. Patterson Insurance News Net March 2006)

9 History of Life Settlements A milestone for the future life settlement industry was the Supreme Court ruling on Grigsby v. Russell which established the policy owner s right to transfer an insurance policy. Justice Oliver Wendell Holmes wrote life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. This opinion placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as stocks and bonds. As with these other types of property, a life insurance policy could be transferred to another person at the discretion of the policy owner A second milestone for the industry was when The National Association of Insurance Commissioners (NAIC) took a crucial step by releasing the Viatical Settlements Model Act defining guidelines for sound business practices.

10 Valuation of a policy for settlement The settlement amount is based mainly on the Net Present Value (NPV) of policy s future payout, less loans and future premiums. The matrix behind this valuation which determines its attractiveness and subsequent interest from providers includes the following: Quality of insurance carrier Death Benefit Age and life expectancy of insured Annual premiums in relation to Death Benefit Overall Policy Value While the death benefit remains a constant (unless there are loans against the policy), the cost of sustaining the policy until the death benefit is realized plays the largest role in valuation of a policy. It is simply a matter of revenue over investment. In measuring the ROI the Provider/Funder needs to determine the cost of sustaining the policy based on, How much the premiums are in relation to the overall Death Benefit How long the premium will need to be paid

11 Market demographics and drivers 1035 exchange Vs. Policy Arbitrage (leveraging Life Expectancy) Policy could have more value if sold and used to fund new policy rather than exchanged via Seller has opportunity to finance new policy in lieu of one that may be underperforming. If used to fund new policy, be sure that insurance agent first gets pre approval for new policy. Life Settlements by Demographic under 65 over 80 4% 16% % Voluntary or Involuntary Surrender Policy lapse for non-payment. Change in status of beneficiary (s). Premiums no longer affordable. Cash needed for retirement or Long-Term care % % Socio-economic drivers behind Life Settlements Key-Man Left company, retired, policy unneeded. Retirement Planning, 8% Estate Planning, 9% Estate Planning Changes in Estate Tax laws. Changes in valuation of balance-sheet assets. Philanthropic Policy donated to a Charity for settlement, possibly offering an enhanced tax deduction. Business Planning, 4% Income Protection, 79% Sanford and Bernstein

12 Definitions and distinctions FUNDERS Typically Funders are large financial institutions that manage investment portfolios. Their chief function is to invest funds and to generate as much return while minimizing risk, sometimes diversifying investments by coupling higher and lower risk vehicles. PROVIDERS Providers are the actual purchasing agents for the funding entity. Providers work on behalf of those supplying the funds to purchase the policy and represent the financial interests of these buyers. BROKERS Life settlement brokers work on their own behalf, garnering a portion of the allowable commission from a life settlement (usually approx. 50%). The only interests that Brokers are protecting are their own. If we look at the players in the life settlement industry, Funders, Providers, and Brokers, we see that in actuality no one is really representing the interests of the agents and their clients without conflict. If the Funders are the money... and the Providers work for the money... and the life settlement brokers work for themselves... The only one who really works for your client is you?

13 Licensing and regulation In 2001, and since with various amendments and modifications, the NAIC Viatical Settlements model Act has provided a set of guidelines and standards for the Life Settlement industry which address issues such as: Licensing Standardized forms and applications Outlines of disclosures to sellers and investors Duties of Brokers and Provider/Funders Rights of the Seller Advertising Ethical standards and practices State by State On a state level there may be the following: States with Life Settlements Law States with Viatical Settlements Law States without Life or Viatical Settlement Law Legislation is currently being proposed

14 Candidates for a Life Settlement Our experience has found that for a policy to be considered investment worthy certain criteria must be met which give a policy a profile attractive for investment. These are the criteria that are generally required for the successful settlement of an unneeded policy. Male: 65 year-old and up Female: 70 year-old and up Death Benefit: $100K and up Policy types: Convertible term, UL, Whole Life, and Survivorship In force for at least 24 months Annual premiums: 10% or less of death benefit Cash Surrender Value: 40% or less of death benefit As we illustrated earlier in Valuation of a Policy for Settlement, there are several factors that are taken into account during the valuation process. A qualifying policy is based on a combination of the above data, each in varying degrees.

15 Getting started How does the settlement process begin? Once there is an interest on the part of the insured to explore the settlement option, what happens? Evaluation An illustration of the policy is sent for initial review. Feedback given to insured and their financial representative. Application The policy owner and information on the insured HIPAA release and disclosure form signed by the insured Contact information on medical care providers Authorization to Release policy information Processing Medical documentation ordered Life Expectancy report ordered Submission All documents verified Documents are packaged for pricing with institutional funders

16 Rescission period May states have a rescission period in which the policy owner may change their mind and cancel the sale of their policy. The rescission period stipulates that the owner may rescind the Life Settlement contract at any time, within the allotted time stipulated by the rescission period. Regulations regarding periods of rescission may differ from state to state). When the agreement to sell the policy is rescinded by the policy owner, the contract is rendered null and void. The death of the Insured during the rescission period will also void the settlement transaction, and the original beneficiaries will be the recipients of the death benefit.

17 A Breed Apart WHY XYZ COMPANY IS YOUR LIFE SETTTLEMENT PARTNER We are the ORIGINAL National Field Marketing Organization. We have established a tradition of providing High Quality PRODUCTS, TOP COMMISSIONS and SUPERIOR SERVICE to Independent Agents across America. Our Professional Staff is highly motivated to Earn, Build and Manage our Producers business. Our staff spends several hours training each week, which allows us to keep our Agents on the cutting edge with NEW Sales Techniques and Marketing Concepts that make our Agents more commissions. We pride ourselves in giving the right answer, right now. We enable you to do Life Settlements with Full disclosure and transparency, because we do not go through Life Settlement Brokers. WE DO THEM OURSELVES!! NO other insurance marketing organization allows you to have your own in-house life settlement department working just for you and your client. We Cut-Out the Middleman, allowing you to transact a life settlement for your client DIRECTLY with the funding entity.

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