Posted on 05/12/2015 7:14:54 PM PDT by doug from upland
(the definition and explanation will be followed by my comments)
Life Settlement AAA |
DEFINITION OF 'LIFE SETTLEMENT' The selling of one's life insurance policy to a third party for a one time cash payment. The purchaser then becomes the beneficiary of the policy and begins paying the premiums. Typically the purchaser is an experienced institutional investor, and policies will have face amounts in excess of $250,000.
A life settlement is similar to a "viatical settlement".
INVESTOPEDIA EXPLAINS 'LIFE SETTLEMENT' Life settlements are usually only done when the insured person doesn't have a known life-threatening illness. They are often done with "key individual" insurance policies held by companies on executives who no longer work there; the company has a chance to cash out on a policy that was previously illiquid.
Sometimes people outgrow their need for a specific life insurance policy, and a life settlement may offer the chance to gain more than the policy's cash surrender value. +++++++++++++++++++++++++++++++++++++++++++++ end
Okay, folks, here is how to benefit in the real estate market. I will explain one of the transactions on which I am currently working.
PROPERTY: +/- 76 acre plantation in the South. Has 5800 sq ft house, large log cabin house, and several out buildings. It is an amazing property.
DEBT: free and clear (free and clear or low debt is necessary to make the formula work)
INDICATED VALUE: $2,000,000 asking price
SELLER MOTIVATION: is currently developing out of the country. This property is excess inventory, which is providing no benefits and is costing money to own. Seller does not need the cash from the transaction.
STRUCTURING THE DEAL FOR MUTUAL BENEFITS:
1) Seller has been offered two $1 million Life Settlement Policies (LSPs). Per doctor reports and health history, the indicated life expectancy of the person (in his late 70s) is approximately 84 months. The premium is about 4% per year.
2) Through the guru of this industry, where I help clients find LSPs at the best discounted purchase (about 20-22 cents on the dollar), we offer the policies for review and approval of seller. Obviously, we are very careful redacting the information released so as not to violate privacy laws.
3) My client is paying for the appraisal of the plantation and, after discussing with an appraiser, we expect the value to come in near the asking price. In 2008, two years after the crash began, it appraised for 2.6 mil.
4) If the appraisal is satisfactory and the policies are approved, will will complete the transaction within about 60 days. Much of the time is down time as we await the insurance company to complete the paperwork for the transfer of the beneficial interest.
5) At closing, the buyer will turn over a suitcase full of cash (only an expression, but real in the world of the Clintons) to cover the premiums for the 7-year life expectancy = $560,000. If the seller has other assets to make premium payments, he can use that 560K to make a real estate deal, solve problems, or for whatever he wishes. The insured may die earlier than 7 years or later. If later, the seller of the property has to be prepared to make extra premiums. If earlier, he has extra money left over from the savings of premium payments. NOTE: the first policy bought by my best client had a life expectancy of 5 years. She died in 9 months and he turned in an initial 210K purchase of the million dollar policy and and 25K premium into one million dollars.
So what has each party received? The seller has gotten his price and receives an asset that will absolutely pay off in cash at some future date. No worries about keeping up the property, taxes, insurance, or damages from nature's wrath. The seller has, of course, given up potential interest on the money. He can evaluate the effect on his investment portfolio and decide whether the deal was worth it to not take a discount on his asking price. If he would have had to discount it to get cash at about 1.5 mil, the benefits of the LSP 2 million payoff can be evaluated against the potential interest lost. The buyer has acquired the property for the investment of 400K for the purchase of two million dollar policies plus 560K at closing for the premiums. He has gotten the plantation at half price and is free to keep it for the benefits it may provide or is in a position to substantially discount it and still make several hundred thousand dollars.
Life insurance companies that may have solvency problems cannot go bankrupt. The state will take over, if necessary, until another company takes on the assets and liabilities. The policies in which I have been involved are with the top rated companies.
Along with many other business interests in which I have been involved, including co-producing HILLARY! UNCENSORED, I have been a California real estate licensee since 1977. My specialty has been creative exchanging, consulting, and problem solving. At the college level for 10 years I taught RE Law, Econ, Practice, and Principles.
Fire away with questions even if not about LSPs. Maybe I can help solve your real estate problem. :)
ping
Another variation, if the seller is in a financial position to make the premiums, is to offer him perhaps 4 mil in policies. That is fine for the buyer, who can get those policies for around 800K or so.
The formula works particularly well with land. Large parcels of land typically take a long time to sell, usually have a down payment and carryback note, and often are asked by the buyer to subordinate to construction financing for a project. The formula will not wpr with cash flow apartments and commercial. Owners are not going to give up cash flow real estate for LSPs.
And some people do want it now, even at a substantial discount. We all have different motivations and needs.
Another transaction we are trying to do is on a 12.5 million estate in a western state on a large parcel of land. It has been for sale for over 4 years. The guy is very wealthy, and all this property is doing is eating money. He gets no benefits from living there, since he is across the country.
This is an interesting premise.
I’m still not clear on the benefit to the seller; he’s getting ±25% of his cash (on a $2 million sale) at closing. If he lives past 7 years he gets more cash.
Is it because the property wasn’t going to move any other way?
Presumably as the broker of the deal, you’re taking a commission– from the seller?
bump for review
May be a bit iffy in Texas right now. Two stories from this week:
The Texas Supreme Court bolstered lawsuits by the state and a group of investors against Life Partners by ruling life settlements are securities subject to the Texas Securities Act and not mere life insurance contracts.
http://www.courthousenews.com/2015/05/12/embattled-insurer-dealt-blow-by-texas-high-court.htm
Regulators (SEC) file complaint against North Texas financial firm
http://www.chron.com/news/texas/article/Regulators-file-complaint-against-North-Texas-6256088.php
States regulate and I work through an insurance broker. But it is a potential concern. Insurance companies do not want them sold. They want them to lapse for failure to pay premiums.
Most likely scenario is seller cannot readily sell and is overpriced. Upon policy maturity, the seller is getting the two mil. That number is set. But only God knows the time.
Great explanation. Thanks!
I recall hearing a radio program (NPR?) where terminally ill people were selling their life insurance policies for a (reduced, balloon) payment, up front to brokers, while the person was still alive.
From what I recall, things were on the up and up contractually, but the sellers (and their previous beneficiaries) cried foul when all was said and done. Predictably, lawyers got involved.
M4L category Housing Scheme
I knew a life insurance agent some years ago who would approach elderly folks with a big net worth and offer them, for example, a $10M policy. The premium might be $9.5M but the advantage to the insured and his heirs would be the money payout at death would escape estate and federal taxation. The agent made a nice fat commission and the heirs paid no tax. I am not sure if this is still legal.
Any experience with this sort of arrangement?
BFL...
bkmk
I do not have an expertise in that area.
My apology for not making it clearer.
At closing, the cash going to seller is to give him the money necessary to make the premiums on the life expectancy on whom the policy is written.
There is no more cash after 7 years. The first policy my best client acquired paid off in about 9 months. The death benefit is a set amount that does not change.
In this formula, the seller is giving up interest on the money he could have earned. The million dollars does not grow. But if this were an asset that was not used personally, was costing money to own, and was not easy to sell, it may give him the benefits he needs to make the deal. If he needs the money from this property to acquire another, this scenario will not work for him. It will work in a very small percentage of transactions, but I posted this to give FReepers a creative idea for which they may someday find use. :)
Yes, I will earn a fee and those things are negotiated with the principals. In the exchange market, it is typical to be paid by the client you represent. In this case, I represent the interest of the client with the LSPs.
Thanks for your excellent reply. I was trying to imagine all of the gears and incentives to all of the parties that make this type of deal possible. Now I get it
: )
I find it fascinating that people are able to conceive and complete deals like this, with a positive outcome for all involved. It’s a necessary and efficient use of capital and resources.
It’s also a shame that people who don’t understand capital (or are jealous of it) try to prevent people like you (and Wall St.) from doing business.
Good for you, I hope you have many more such deals.
5.56mm
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.