144a Senior Life Settlement Policies
Nature of the Policies
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Senior life settlements, in general, are life insurance Policies that have been issued on the lives of people whose life expectancy has been estimated by trained medical professionals. These life insurance Policies are then sold to investors for an amount that is less than the face amount of the Policy that will become due and payable upon the death of the insured. Usually, the insured person on these Policies is elderly ranging in age from 65 to 85 years old. Senior life settlements are often compared to zero-coupon notes in that they are Policies that are purchased at a discount to their face value with this so-called “amount certain” becoming due in the future. When a person purchases a zero coupon note or other debt instrument, the maturity date is certain and is printed on the instrument; in contrast, when an investor purchases a senior life settlement Policy, the maturity date is uncertain as the date and time of death of the insured is unknown.
Consequently, the purchaser of the senior life settlement Policy must continue to pay the premiums on the Policy to maintain the insurance coverage in force. The amount of time that the insured lives thus directly impacts the rate of return for the investor; further, each additional year of coverage requires additional premium expenditures which decrease the ultimate return realized.
When senior life settlement Policies are sold, the discounts to face amount are determined by the life expectancy, individual Policy features and market conditions for the Policy. Yield is computed from the difference between the cost basis (including any premiums paid) and the amount paid out under the Policy on its maturity. An annualized return on investment can be derived by dividing the yield by the number of years remaining until it matures. While any licensed life insurance company may issue life insurance Policies, the life insurance industry in the United States is highly regulated and controlled for the protection of not only the investors who purchase and own securities in these companies, but most importantly for the people who are buying the insurance Policies in the first instance.
Acquisition of the Policies
Senior life settlement transactions involve the sale of an existing life insurance Policy to another party. By selling the Policy, the policyholder receives an immediate cash payment to use as he or she wishes. The purchaser takes an ownership interest in the Policy at a discount to its face value and receives the death benefit under the Policy when the insured dies.
For the protection of the seller’s ownership interest and the purchaser’s monetary interest, all transactions are closed through an independent escrow agent. The escrow agent closes a purchase when it receives from the purchaser an executed Policy funding agreement and the acquisition price for a Policy, verifies that the Policy is in full force and effect and that no security interest has attached to the Policy, and receives a transfer of Policy ownership form acknowledged by the insurance company or receives an assignment of the beneficial interests in the trust from the beneficiary and from the trustee of the trusts that hold the Policy. The escrow agent then pays the seller the purchase price (net of fees and costs).
.net can act as escrow agent with respect to the purchase of the Policies. At the closing of the purchase of the Policy, the title to the Policy is transferred into the Company’s name (except where a beneficial interest in a trust is being assigned in which event title remains in the name of the trust). Under the Indenture, the Company will execute a collateral assignment of the Policies in which the Company will purchase and grant to the Trustee a security interest in the beneficial interests of trusts holding Policies that the Company will purchase in each case for the ratable benefit of the Noteholders and .net or another escrow agent will hold the Policies as custodian. After the closing, responsibility for Policy premium costs passes to the Company as purchaser, and we will fund the premium costs and servicing fees through a Premium Reserve Account set up under the terms of the Indenture out of which the Trustee will deliver to the Servicer, and the Servicer will then pay, the premiums on our behalf and receive its fees. The confidentiality of a life settler’s personal information is maintained throughout the purchase of the Policy insuring his life.