Life Settlements Explained with Chris Orestis

Join Kelly and her guest, Chris Orestis, President of Retirement Genius, as they discuss life settlements.

In this episode:

🔹 What is a life settlement and how do they work?

🔹What types of policies qualify for a life settlement?

🔹 Who is eligible for a life settlement? 

🔹 How is it different from a viatical settlement?

🔹 How long does the selling process typically take?

🔹 What are the different life settlement payout options?

🔹 How are life settlements taxed?

Watch this episode on YouTube:

https://youtu.be/PyKC_fh1Bwk

Learn more about Chris and Retirement Genius: 

https://chrisorestisrg.com/ 

For additional information about Kelly, check her out on Linkedin or www.SteadfastAgents.com.

To explore your options for long-term care insurance, click here.

Steadfast Care Planning podcast is made possible by AMADA Senior Care and Steadfast Insurance LLC.

Come back next time for more helpful guidance! 

Transcript

Kelly Augspurger: [00:00:02] Hey everyone. Welcome to Steadfast Care Planning, where we plan for care to live well. I'm your guide, Kelly Augspurger. Today with me is Chris Orestis, President of Retirement Genius. Thanks so much for being here, Chris!

Chris Orestis: [00:00:15] Well, Kelly, it's great to be here. Thanks for having me on. I'm excited to have this conversation.

Kelly Augspurger: [00:00:19] Likewise. To give you listeners a little bit of a background, Chris and I met at the ILTCI conference in March where I heard him speak about life settlements, and I learned a lot from him in that session. I knew that I wanted to have him on my podcast so that all of you could learn something, too. So today we are going to talk about life settlements. So, Chris, are you ready?

Chris Orestis: [00:00:40] Absolutely. It's an interesting topic and I think more people are aware of it now than they ever have been before.

Kelly Augspurger: [00:00:46] That's right. So let's get into it, Chris. What is a life settlement and how does it work?

Chris Orestis: [00:00:52] Well, you know, simply enough, the definition of a life settlement is the sale of a life insurance policy from the owner to a new owner. Somebody will buy the policy from them. Now, the people that are selling policies typically are going to be seniors, people who maybe are challenged with health conditions and the buyers of the policies are big financial institutions, hedge funds, investment banks on an annual basis. People are selling their policies by the billions of dollars every year.

Kelly Augspurger: [00:01:24] Wow. Okay, so what types of policies qualify for a life settlement, Chris?

Chris Orestis: [00:01:29] Well, any kind of life insurance policy is going to qualify. So a term life policy, a universal life policy, a whole life policy, a variable policy, any kind of life insurance policy can qualify for a life settlement. Typically, the minimum death benefit is going to be $100,000 or greater.

Kelly Augspurger: [00:01:49] Okay, interesting. So you said term life insurance. I would not have thought term life insurance would qualify since it doesn't have cash value. So how does that work?

Chris Orestis: [00:01:59] Well, that's a common misconception, let's say. Life settlements are not based on cash value. They're based on the death benefit of the policy. So when you do a life settlement, you're selling the death benefit, you're selling the policy. And remember life insurance policies are assets. They're actually legally recognized as property in the same property ownership class as your home. And that's actually a good analogy to make for people to kind of get a sense of what this is, where it fits in their world. You own a home, you make mortgage payments for years on that home. And then after years of living in the home, if you decide you're not going to stay there anymore, you don't just drop your keys in the driveway and drive off and leave your house behind. You sell it. It's an asset. You sell it for its market value. Well, it's the same thing with a life insurance policy. You make premium payments for years, and life insurance policies ends up being one of the most valuable assets a person owns. And when you're done with the policy, you don't need it any longer, you don't want it any longer, instead of just lapsing it or surrendering it for its cash surrender value, you should also find out first, could you qualify for a life settlement, sell it off and maybe get a higher market value for selling the policy as an asset instead of dumping it.

Kelly Augspurger: [00:03:17] I see. And so you said qualify for a life settlement. Tell us who is eligible for a life settlement?

Chris Orestis: [00:03:22] Well life settlements are a very unique financial transaction because they are specifically designed to economically reward somebody. The older they are or the more impaired their health is. So when you think of a life settlement, think of it in terms of reverse underwriting. The younger and healthier you are when you buy insurance, the better that's going to be for you. But if you time comes that you own a life insurance policy and you think you might want to sell it off through a life settlement, now the older and quite frankly, the sicker that somebody is, the better a life settlement is going to be for them. So somebody who's too young and healthy is not going to qualify for a life settlement, just like somebody who would be too old or impaired with their health wouldn't qualify to buy insurance.

Kelly Augspurger: [00:04:10] Got it. Interesting. Okay, so if you're 50 years old and you have a few years left in your life policy and you're still active, engaged and working, you know, and you're like, do I keep paying these premium payments? I don't necessarily maybe need it or maybe you're 60 years old, you have to be in poor health to really be able to get a good amount of this policy. It's not like, oh, my term is coming to an end, I want to get something back in return. That's not how it works, right?

Chris Orestis: [00:04:34] Again, we see this happen. We'll get contacted by people in their 50s or 60s, even their 70s, but they're perfectly healthy. They're not going to qualify for a life settlement. It's the combination of age, typically 65 and above, the size of the policy's death benefit, $100,000 and above, and that there are some health impairments. Again, the older and sicker somebody is, the more a life settlement can do for them. If you're too young and healthy, you're not going to qualify.

Kelly Augspurger: [00:05:02] Got it, so how is this different from a viatical settlement, Chris? I think some people have probably heard that term before. What's the difference?

Chris Orestis: [00:05:09] Yeah, viatical settlements is sort of where all this started three - four decades ago. Viatical settlements are specifically regulated as a settlement for somebody who is terminally ill. So if you have two years of life expectancy or less, you have a terminal illness, a terminal condition, then a viatical settlement, which is regulated in ways differently than a life settlement, which would be for somebody with a longer life expectancy. The life settlement world typically the person who's going to qualify is going to have a life expectancy between 2 and 10 years remaining measurably through underwriting. Actuarially looking at their medical records, you're going to be able to somewhat determine what you think a reasonable life expectancy range is and if somebody looks like they're going to be living longer than ten years, you know, you're starting to get to 15, 20, 30 years of remaining life expectancy, that's just too long of a remaining life expectancy to work for life settlements. Like I will tell people, when they apply for a life settlement, they don't qualify. I'll tell them, well, the bad news is the good news, you don't qualify for a life settlement.

Kelly Augspurger: [00:06:17] Yeah, I see that, and what about that underwriting? So you said medical records to find out if you're eligible. I would imagine there's some questions that, you know, typical questions that you ask, but after an application is filled out, what can people expect when they're trying to qualify for a life settlement?

Chris Orestis: [00:06:32] You know, from start to finish, the life settlement process will take about 90 days. Initially, you're going to submit a simple application with some basic information: who you are, contact information, age, gender, the type of policy you have, the size of the policy and some health information. What are your prevailing health conditions? What are the medications that you're taking? And from that you can maybe identify quickly if somebody is not a prospect for a settlement and let them know you're not going to qualify. But maybe in the future, if you hang on to your policy, you will. Going forward, though, if somebody looks like they are going to qualify, then there's going to be a collecting of medical records to review what their current health conditions are, any diagnosis, any prescriptions. And from there, you're going to start to paint a picture of what their health is and what their potential remaining life expectancy is. That gives you the information to then figure out what percentage of the death benefit would it be possible to pay to that person in exchange for settling their life insurance policy? Because in the end, that's how it works. You're selling your life insurance policy for a percentage of the death benefit today, its present day value.

Chris Orestis: [00:07:46] So round numbers, let's say you had $100,000 life insurance policy and based on the underwriting, it looked like your life expectancy was going to be between 5 and 10 more years. Maybe you'd be getting 20 to 30% of the death benefit paid to you today for a life settlement. The range can drop down into the 10% even below range and can get as high as 50 and 60%, but on average, you know, 20%, 25%, let's say, and once the settlement was done, you'd no longer be responsible for making any more premium payments. You would no longer be the owner of the policy. Your beneficiaries would be replaced by the new ownership, the investment bank that now owns the policy. And someday, years in the future, when that person passed away, that ownership group would actually collect the death benefit. That would be their return on the investment that they had put out in buying the policy by putting that money up front, keeping it in-force over years with premium payments. The target typically for investors is somewhere in the 10 to 15% return on investment range is what they're trying to achieve when ultimately that death benefit pays out to them years in the future.

Kelly Augspurger: [00:09:00] And now for a brief message from our show sponsor. The Steadfast Care Planning podcast is sponsored by Steadfast Insurance, an independent insurance agency in Westerville, Ohio, that provides home, auto, business, life, disability, and long-term care insurance solutions. Visit www.SteadfastAgents.com to learn more.

Kelly Augspurger: [00:09:19] So are these insurance companies, are they typical insurance companies? Are these high risk insurance companies or what are these companies look like?

Chris Orestis: [00:09:28] The insurance companies that issue life insurance policies, of which the owner would be selling in a life settlement is the full range of insurance companies out there. Name any life insurance company out there and you can settle their policy. Remember, it's the legal right of every policy owner to be able to sell off their life insurance policy. It's an asset they own and they have the legal right, which has been guaranteed actually by the Supreme Court going back over 100 years in a landmark decision back in 1911 that determined life insurance policies were assets owned by the policy owner that they could use for collateral that they could use to take out loans, that they could change the beneficiary at any time, and that if they wanted to, they could sell it off. It could be transferred, the ownership for valuable consideration. So any life insurance carrier out there, any company out there with any type of policy is a potential candidate for a life style.

Kelly Augspurger: [00:10:32] Great. Okay. Well, what are those different life settlement payout options? What does that look like? If someone is ready to move forward, they've got a policy, they're ready to sell it. What can they expect? I mean, you gave some percentages, but I think there are different payout options, too, right?

Chris Orestis: [00:10:46] Well, there are, and it's actually, a great question. I'm so glad you asked it because the way we look at life settlements, the life settlement is not the end goal in and of itself. It's a means to an end. A life settlement is a financial tool to help a senior who's struggling with the unique challenges of aging and declining health. How to now use that policy as a financial vehicle to meet their goals, their needs. So through a life settlement and liquidating that policy, you could receive a lump sum of cash. You could also receive money that could be used in a tax advantaged way, depending on your underwriting and the immediacy of your need for care to pay for health and long-term care purposes. You could use the funding from a life settlement to then roll over into an annuity to establish a lifetime guaranteed income stream. Or you could actually decide instead of taking cash to reduce the death benefit and hang on to a reduced retained death benefit without any more premium payments, and you could mix and match those options. You could decide to take some in cash and deploy some towards long-term care or some towards an annuity or keep some as a retained death benefit, some as cash or in those financial vehicles. The point is the life settlement takes the asset, gets the market value for it, and then creates new options to be able to address those financial needs that somebody would have with retirement and health and long-term care challenges that are coming at them that can get very expensive.

Kelly Augspurger: [00:12:22] Right. That's fascinating. So what do you see most often, Chris, as far as the payout options? What are people typically taking? Are they typically taking that lump sum?

Chris Orestis: [00:12:30] Yeah, I would say that the vast majority of people are taking the lump sum, but then again, they could take that lump sum and then decide, well, let's take the lump sum, but now let's put some into an annuity or let's take the lump sum and now let's put some or as much as we need towards long-term care. So it really becomes a matter of you've got that money and now what are the needs that you need to have addressed? And working with an advisor, which is why advisors are so important in the mix to give good guidance to their clients so they're well informed with the idea of first accessing life settlements and then what to do with those resources once they've actually gone through with that process. And you've come out the other side and you're sitting on tens to hundreds of thousands of dollars, now what are you going to do with that money to address your needs in a very well structured, well thought out way.

Kelly Augspurger: [00:13:20] Right, to best be prepared for retirement and to handle all of those expenses and situations that might come up.

Chris Orestis: [00:13:26] Or that are currently coming up while you're in retirement when it's happening in real time as we speak. We see people all the time who will come to us with, you know, they need to get their mother home care or into an assisted living community or they're running out of money. And all of a sudden the idea of using the life insurance policy, which they hadn't thought of, all of a sudden becomes a very real opportunity to address that shortfall that they've been struggling.

Kelly Augspurger: [00:13:51] Right, another tool in the toolbox. Another thing that can be used.

Chris Orestis: [00:13:55] And the other thing is that people now are more aware of life settlements than they've ever been before. They're seeing TV commercials every day. They're radio ads, online ads. Anywhere you go now, you're seeing as much advertising about life settlements as you do reverse mortgages or Medicare Advantage plans. It's just everywhere, so people are aware of it. The question is, how are they going to access it? And to me, I say one of the best ways to do it is with the guidance of an advisor.

Kelly Augspurger: [00:14:22] Yeah, great advice. So once you have those payout options, is that money taxed, Chris? And if so, how is it taxed? Because we know life insurance, death benefits are tax free. So is it the same case with the payout from the life settlement?

Chris Orestis: [00:14:36] Well as I always say, first and foremost, the best use of a life insurance policy is to keep it in-force until it pays out the death benefit to your beneficiaries, but if that insurable interest isn't there any longer or you can't afford it any longer, you've decided it's time to get out of this life insurance policy or you need the resources that it could get for you, it's more important today than a death benefit in the future. Then it's time to look at the life settlement in the value of the policy. Now, in terms of tax implications, let me first be clear. I'm not an accountant. I'm not a tax advisor, and this is not tax advice, but the way it works is that the amount you receive from a life settlement up to what you've paid in premiums into the policy will be tax free.

Kelly Augspurger: [00:15:24] Okay. Up to that cost basis. Okay.

Chris Orestis: [00:15:26] Right, up to your cost basis in the policy, Above that, then you're starting to look at capital gains and you'd need to dig into where you are capital gains wise above your basis in the policy, but another exception for taxation on a life settlement is you're underwriting that comes back to the viatical settlement. If you have two years of life expectancy or less remaining or you have two ADLs or more, you're considered chronic, then there's a tax exemption on the proceeds from a life settlement, freeing you from federal tax burden based on your underwriting and your health situation.

Kelly Augspurger: [00:16:01] I see, so that's going to be determined in the underwriting process on whether or not that is going to be taxed. Okay. Interesting. Chris, any other advice on how people can plan for care to live?

Chris Orestis: [00:16:13] Well as we said earlier, you know, life settlements are reverse underwriting. They you know, look at those as something that as you reach your senior years, that starts to become an option for you, but in your younger years, certainly you want to take advantage of being young and healthy to buy insurance to make sure you have long-term care insurance, make sure you have life insurance, and also make sure you understand other options that are out there, particularly those that are designed to help seniors, finding themselves in sort of an immediate crunch for money for their retirement or health and long- term care needs. Looking at things like a reverse mortgage, looking at things like the VA Aid and Attendance benefit, looking at other forms of annuities that can be structured to protect money from market swings from it being squandered from to being able to establish a income stream for a retirement costs and long-term care costs. So there's things you can do early on to plan for care, but there's also things you can do to address an immediate need for care. It's just a matter of being aware of do you have a life insurance policy? Are you a veteran? Do you have a home? You have options. If you don't feel like you've adequately planned, you can't afford to just start cutting checks and paying for home care. And so you think you have no other choice but maybe to go on to Medicaid before you do look at the range of options that still might be available to you because they're out there. And again, the best way to learn about those and access those is through the guidance of an advisor of an expert, somebody who can help you understand the options and then get to them through the best vehicles to access them.

Kelly Augspurger: [00:17:56] Yeah, wonderful. Thanks, Chris. I think you've given us a lot of really good info here today and really talking about, I think a lot of the misconceptions about life settlements. I know I used to have really a false idea of what a life settlement was and I thought it was really a scary thing and that almost it was a scam, much like what I used to think about reverse mortgages. Now I know better because I'm educated and that's what we really want people to do. We want people to get educated. If you don't understand, reach out to experts that do have the information so that they can give you the right information so you can make an informed decision about is this going to be an option for me? Is this the right fit? So thanks, Chris.

Chris Orestis: [00:18:34] Absolutely. You know, life settlements are a very well regulated transaction. They've been around for decades now. You're seeing commercials all day, every day. There's so much information and resources out there. It's very well regulated. And I go back to the analogy I made - would you abandon your home without selling it? It's a valuable asset. Why would you abandon a life insurance policy without selling it? It's a valuable asset. Among the resources that are out there are Retirement Genius. Our company, our website's www.RetirementGenius.com. We've got plenty of information about that and other resources to help people live and manage their retirement years, this being one of them. And it's just great to have an opportunity, Kelly, to talk to you and share this kind of information, get the word out and help people overcome either a lack of awareness that this exists or their misconceptions of thinking it's one thing when it's actually another.

Kelly Augspurger: [00:19:29] Right. Well, I appreciate your time, Chris. Thanks so much for joining me and have a wonderful day.

Chris Orestis: [00:19:35] Well, Kelly, thank you.

Kelly Augspurger: [00:19:36] Bye bye.