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'KEY-MAN' POLICIES CAN BE SOLD By: Stephen M. Watson, Esq. Tired of making premium payments on large "Key-man" and Buy/Sell Agreement policies that you no longer need? Now there is a service that takes advantage of the little-known fact that life insurance policies, like most any other valuable asset, can be sold. This comes as good news to businesses and high net worth individuals because there are many instances in which these policies can become outdated, too expensive, or simply not needed anymore. Instead of surrendering these policies for their cash value, or even worse, allowing these policies to lapse, the policies can be sold. The sale of a life insurance policy is called a viatical settlement. The term "viatical" has its roots in the Latin word viaticum, a term used to describe the provisions that ancient Roman families provided to soldiers going off to war. Today, viatical settlements are used to provide policyholders with a source of funding while the insured is still living. There are large well-funded companies that will purchase policies where the individual has reached retirement age, regardless of the person's health condition. If there are health complications involved, these companies will buy the policies regardless of the insured's age. Life insurance policies can represent millions of dollars in assets. For instance, when a business merges with another, or is acquired by another, the key-man policies often transfer to the new owner and become assets of the new entity. Generally, however, the key executives of the acquired entity are not key executives in the new entity. Thus, the acquiring company generally is left with three choices, depending on the type of policy: 1) stop the payments on term policies and let them lapse by their own terms; 2) surrender policies for their net cash value; or 3) keep the policies and maintain the premium payments until the death of the insured persons. With the advent of viatical settlements, the business owner has another alternative: sell the policies. There are no restrictions. Moreover, once the policies are sold, there are no more policy premiums to pay. Most any kind of life insurance policy (whole life, term, universal, split-dollar, etc.) from most any insurance underwriter can be sold. Thus, value can be captured from a term policy, which otherwise has no cash value on its own. Also, with insurance policies that do build up cash, the business owner can receive more than the cash value. Many employees are offered their key man or buy/sell agreement policies upon retirement. The employer no longer needs the policy, so it offers the policy to the retiree. Often, however, the offer to take over the policy is declined because the retiree does not need it, or does not want to take on the high premium payments. In these instances, the employer often simply cashes in the policy for its cash surrender value or allows a term policy to lapse. But there is a better planning opportunity for both the retiree and the employer. First, the retiree should contact a viatical settlement broker before he accepts or rejects the offer to take over the policy. That way, the retiree can obtain a quote for the sale of the policy before making a decision, and if the quote is favorable, the individual can accept the policy and then immediately sell it before making even the first premium payment. Likewise, for the employer, if the retiree does not wish to accept the policy, it can investigate, at no cost, the advantages of selling the policy through a viatical settlement broker. Again, if it is a policy with cash value, chances are good that more than the cash value will be received from the sale; if it is a term policy, which by it's nature has no present value, the policy can still be sold, thereby extracting funds from what until now had no intrinsic value. In a similar vein, seniors sometimes wish to donate large life insurance policies to their favorite charitable organization. They do this to: a) receive a deduction on their income tax return for the amount of the cash value of the policy; and b) reduce the size of their gross estate for federal estate taxation purposes. Once the gift is made, the charitable organization is charged with the duty of continuing the premium payments (though the donor often gives sums each year to the organization to offset these payments). Here again there are opportunities for planning. Instead of simply donating the policy, the policyholder should first determine the fair market value of the policy by obtaining a quote from a viatical settlement broker. If the fair market value (the amount of the quote) is higher than the cash surrender value, the policyholder should enjoy a larger tax deduction. Once the policy is given to the charitable organization, the organization sells the policy in accordance with the prearranged plans made by the policyholder and the viatical settlement broker, and there are no continuing premium obligations. The charitable organization gets the use of the funds right away, with no premium payment liabilities, and the policyholder/donor gets to see the money go to work for a favorite charitable organization right away. The high net worth individual can take a high dollar insurance policy out of a taxable estate by selling it. Then the seller can either spend down the cash received, or gift the cash to children or charitable organizations. Either way, the individual will have the advantage of seeing the money work--while still alive. Note, too, that in cases where the person is terminally ill (24 month life expectancy or less), federal legislation provides that proceeds from the sale of a policy are received tax-free. There is an exception, however, for policies held for a business purpose (Internal Revenue Code of 1986, as amended §101(g)(5)). Nonetheless, life insurance policies are generally capital assets, and as such, are entitled to the more favorable capital gains treatment on the excess of the amount received over the cash surrender value. With the lowered capital gains rates provided in the Taxpayer Relief Act of 1997, a sale of a life insurance policy becomes an even more tax efficient transaction. These are just a few of the examples of how life insurance policies can provide a source of funding for businesses and individuals with high net worth. In general, purchases of policies may be made from those who are of retirement age, regardless of their health, and from those who have health complications, regardless of their age. The policy has to have been in effect for at least two years so as to be beyond the insurer's contestability period, and any kind of policy will be considered (whole life, term, universal, split-dollar), from most any major life insurance underwriter. The bottom line is, before a policy is simply cashed in for its cash surrender value, or before a term policy is simply allowed to lapse, contact a licensed viatical settlement broker to see if more money can be obtained through the viatical settlement alternative. There are no costs or obligations associated with the service. Many policyholders are pleasantly relieved to know that they can receive more money for their policies--possibly tax-free--and that they will never have to make a policy premium payment again. Quick Tips: Stephen M. Watson offers the following insight on selling life insurance policies. 1. Any policy can be sold: Any kind of life insurance policy can be sold (term, whole-life, universal, split-dollar, etc.), from most any life insurance underwriter. 2. Health is not an issue: Anyone with adverse health conditions, or who is age 65 and over, is eligible to sell a policy. 3. No cost for quote: Since there is no cost or obligation involved with receiving a quote for a policy, anyone considering cashing in a policy for its surrender value should first consult a viatical settlement broker to determine if more money can be obtained by selling the policy. 4. Treated as capital gains: In general, the proceeds received from the sale of a policy in excess of the cash value would be subject to capital gains treatment, as opposed to being taxed as ordinary income. ---------------------------------------------------------------------------------------------------------------------- Stephen M. Watson, President of Viatical Settlement Professionals, Inc., is
an attorney and licensed Viatical Settlement Broker. He is a graduate of The
University of Virginia, and Washington & Lee University School of Law. |
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