Glossary
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1035 Exchange – A tax-sheltered exchange of cash value from one life insurance policy to another. This allows an individual to avoid capital gains or losses in the first policy as long as the second policy is of greater or equal cost.
Accelerated Death Benefit – A feature of a life insurance policy that typically pays some or all of the policy’s death benefit before the insured dies. It may provide a way to get cash from a policy without selling it to a third party.
Accredited Investor – As used in Regulation D, this shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:
Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
Any private business development company as defined in section 202(a)(22) of the Investment Advisors Act of 1940;
Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000
Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000;
Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and
Any entity in which all of the equity owners are accredited investors.
Beneficiary – The person(s) named by the owner of the policy to receive the life insurance proceeds upon the death of the insured.
Broker (Life Settlement Broker) – A person who, on behalf of an policyowner and for a fee, commission or other valuable consideration, offers or attempts to negotiate a sales contract between a policyowner and one or more providers, the subject of which is a life settlement. A broker represents only the policyowner and owes a fiduciary duty to the policyowner to act according to the policyowner’s instructions, notwithstanding the manner in which the broker is compensated. A broker does not include an attorney, certified public accountant or financial planner retained in the type of practice customarily performed in their professional capacity to represent the owner whose compensation is not paid directly or indirectly by the provider.
Cash Value/Cash Surrender Value – The amount that is available in cash for loans and/or withdrawals. Accessing cash surrender value may reduce the death benefit and may increase the risk of lapse. Withdrawals may be subject to surrender charges and could have a permanent effect on the cash value. If the policy is surrendered, the cash surrender value is paid to the policyowner.
Chronically Ill – This means (1) being unable to perform at least two activities of daily living (i.e., eating, toileting, transferring, bathing, dressing or continence), (2) requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment, or (3) having a level of disability similar to that described in (1) as determined by the Secretary of Health and Human Services.
Consumer – An individual who has purchased a policy and now wants to sell it. Unlike most markets, consumers in the life settlement industry are sellers.
Convertible Term Insurance - Term insurance that can be exchanged (converted), at the option of the policyowner and without evidence of insurability, for a permanent insurance policy. Most term insurance is convertible.
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Escrow Company – A neutral third party that by a legal arrangement receives the money to be held in a trust pending a contingency or the fulfillment of conditions in a contract such as the payment of a purchase price. Upon that event occurring, the escrow agent will deliver the asset to the proper recipients and payment to the seller.
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Face Amount – The amount stated on the face of the policy that will be paid in case of death. It does not include additional amounts payable under accidental death or other special provisions, or acquired through the application of policy dividends.
Financing Entity – In the life settlement industry, a firm contracted to provide the funds necessary to finance a settlement.
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Insured – The person covered under the policy being considered for sale.
Investors – Entities that puts forth funds toward a pool of policies with the expectation of a financial return from the maturity of policies.
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Key Person Life Insurance – When one has a key person in a business without whom the business would suffer financially, key person life insurance is often purchased, which helps to reimburse the company for the business loss incurred by the death of this person.
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Life Expectancy – The number of months the individual insured under the life insurance policy to be sold can be expected to live as determined by the life settlement provider considering medical records and appropriate experiential data.
Life Expectancy Company – Actuarial and physician experts who apply probability theory, actuarial methodology, and medical analysis using the records of the insured to calculate the probable life expectancy of an insured.
Life Settlement – The sale of a life insurance policy insuring the life of an individual who does not have a catastrophic, chronic or life threatening condition and who fits specific eligibility parameters. The amount paid in a life settlement is greater than the cash surrender value (if there is any) and less than the face amount of the policy. The entity that buys the policy is known as a life settlement provider. A life settlement broker arranges the sale of a policy and obtains the highest offer in the marketplace. The proceeds of a life settlement are unrestricted and can be used in any fashion. After the sale, the life settlement provider assumes all of the rights and obligations of the insurance policy.
Life Settlement Broker (Broker) – A person who, on behalf of an policyowner and for a fee, commission or other valuable consideration, offers or attempts to negotiate a sales contract between a policyowner and one or more providers, the subject of which is a life settlement. A broker represents only the policyowner and owes a fiduciary duty to the policyowner to act according to the policyowner’s instructions, notwithstanding the manner in which the broker is compensated. A broker does not include an attorney, certified public accountant or financial planner retained in the type of practice customarily performed in their professional capacity to represent the owner whose compensation is not paid directly or indirectly by the provider.
Life Settlement Provider (Provider) – A firm specializing in purchasing life insurance policies in the life settlement market. Providers normally resell the insurance policy to institutions called financing entities. A provider works on behalf of the financing entities that they represent.
Maturity of Policy – The policy matures, or pays a claim, when the insured dies and upon presentation of evidence of the death and the validity of the claim to the insurer.
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Net Death Benefit – The amount of a life insurance policy or certificate less any outstanding debts or liens.
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Permanent Life Insurance – Any form of life insurance except term; generally insurance that builds up a cash value, such as whole life and universal life. Coverage can last a lifetime.
Policyowner – The person who owns a life insurance policy or the certificate holder under a group policy.
Premiums – Payments to the insurance company to keep a policy in force.
Producer – A person who sells life insurance.
Provider (Life Settlement Provider) – A firm specializing in purchasing life insurance policies in the life settlement market. Providers normally resell the insurance policy to institutions called financing entities. A provider works on behalf of the financing entities that they represent.
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Secondary Market – The financial market for the trading of securities that have already been issued in an initial private or public offering. Alternatively, secondary market can refer to the market for any kind of used goods, such as life insurance policies.
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Terminally Ill – Having an illness or sickness that can reasonably be expected to result in death in twenty-four (24) months or less.
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Viatical Settlement – (from the Latin “viaticum” (vi-at-i-kum), meaning an allowance for traveling expenses or provisions for a journey.) Historically, the proceeds from the sale of a life insurance policy to a third party by a catastrophically, chronically or terminally ill individual is called a viatical settlement. Laws in certain states define the term “viatical settlement” to mean both a viatical settlement in the historical sense and a life settlement.
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