Life Settlement Premium Finance Rescue Case

Selling Policy Helped Client Offset Losses on Loan

March 30, 2019 

When properly constructed and responsibility administered, premium financing is an effective tool for wealthy clients. In addition to providing financial leverage from retained capital, premium financing enables clients to address tax planning and legacy creation while freeing-up other assets that yield a return greater than the cost of the loan.

But the risks are obvious. What happens if the policy is under-performing due to low interest rates? Premium financed loans are typically secured by other assets, meaning the client must post collateral equal to the difference between the cash surrender value of the policy and the loan balance. Without a cautious, informed approach along with proactive management, the outcome can result in loan default – as it did in this case where the loan was collateralized with the client’s annuity.

Regardless of what may have been a flawed approach in terms of case design, the client’s primary objective at this point was to stop the damage and mitigate her losses. An advisor suggested she explore the possibility of selling her policy in the secondary market. Although a number of complex challenges stood in the way before a buyer would agree to purchase the policy, Asset Life Settlements was successful in negotiating a cash settlement from a secondary market buyer for $510K which substantially reduced the client’s debt burden. 

Quick Facts
►  86 yr. old female
►  $2.2 million UL policy, purchased for estate planning purposes via premium financing
►  $220,000 Annual Premium
►  $130,000 Cash Surrender Value
►  $930,000 Premium Financed Loan
►  $800,000 Annuity Used as Collateral for Loan
►  $510,000 Proceeds from Life Settlement (used to offset potential loss of $930,000)
►  $420,000 Remainder of client’s debt following life settlement

The Problem

The client had entered into the premium financing arrangement in 2009 in order to purchase the $2.2M policy for estate planning purposes. However, the policy did not perform as originally illustrated and the client was facing foreclosure on the loan totaling $930K.

The Challenge

The client’s representative asked Asset Life Settlements to evaluate the case to determine whether the cash proceeds from a life settlement could be used as a rescue strategy to reduce her debt obligation, and hopefully, preserve a portion of her annuity assets.
Although the policy had a cash surrender value of $130K, the client was unwilling to pledge any other assets to satisfy the collateral call above and beyond the $800K annuity which had already been applied. As a result, the lender initiated foreclosure proceedings.

Asset Life Settlements pre-qualified the applicant and started the underwriting process. The strategy was to position the case as an attractive investment to multiple buyers, in spite of a third party loan with a collateral assignment with the carrier. Although the insured’s age and other factors met most buyers’ qualification guidelines, the loan on the policy presented a roadblock. Some buyers simply would not agree to purchase the policy because of the complexity of the loan assignment. 

The Solution

All parties proceeded based on the premise that once the assignment was lifted, the life settlement transaction could be finalized and the cash proceeds from the settlement applied toward the loan. Asset Life Settlements negotiated an arrangement with the lender to use the client’s annuity to satisfy the loan and get the assignment lifted. Asset Life Settlements continued to negotiate for the highest offer.  We were successful in negotiating an offer in the amount of $510K which reduced the client’s debt obligation from $930K to $420K.

The Take-Away

Life settlement transactions, especially those that involve high net worth clients and advanced case design, often require complex strategies to achieve a favorable outcome. In this case, our experience favorably impacted the client by more than half a million dollars ($510K).

It’s critical to work with an experienced broker like those of us at Asset Life Settlements. We understand the legal technical aspects of estate planning, and we have a reputation among buyers for negotiating win-win solutions in spite of the odds and complexities of any case.

If you would like to learn more about life settlements or have a potential case you would like to discuss, contact us at 1-855-768-9085.