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FEATURE STORY
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Life Settlement
NumberCruncher
Software designed to help you
decide whether to keep or settle life insurance policies
By Donald H. Kelley
Kelley Rating (one asterisk = lowest, to five asterisks = highest):
* Ease of navigation, design of interface and learning curve ****
* Instructional documentation and help system ****
* Carries out the goal of the product as advertised *****
* Overall usefulness ****
As wealthier clients age, there may come a time when they need to decide
whether to continue paying premiums on a life insurance policy or
dispose of the policy through a life settlement. These days, even Wikipedia
is claiming that: "A growing number of experts now believe that
informing clients about offering life settlements should fall under the
fiduciary duty of a financial advisor." During the estate-planning
process, this concern extends to other advisors, such as attorneys and
accountants.
The new Life Settlement NumberCruncher program by Steve Leimberg and Mike Weinberg is an excellent
tool that helps you evaluate whether to keep or settle a policy.
The secondary life insurance market has exploded in recent years. It
typically involves the insured/policy owner, the insurance agent or
broker, the life settlement provider (who assembles and prices the
deals) and the funder (such as a hedge fund.)
For a quick description and analysis of the secondary life insurance
market, see Jay Vadiveloo (Deloitte Consulting), "The
Life Settlements Market, an Actuarial Perspective on Consumer Economic
Value," ACORD LOMA Life Insurance Forum (May 23, 2006).
The market for life settlements targets situations in which there are
large policies and elderly insureds with impaired mortality. Life
Settlement NumberCruncher will help you address the numerical
component of the decision to retain or sell the policy. This program
also should help you fulfill your professional (and perhaps even
fiduciary) responsibilities to give well-reasoned responses if a client
consults you regarding an offer to purchase such a policy or asks later
why you didn't recommend a life settlement -- or if, after the client's
death, the policy beneficiaries question why you recommended a life
settlement.
The New
York State Insurance Department -- "Life Settlements -- Top Ten
Questions" and "Life
Settlements -- Life Insurance Rescue" from the Quatloos website help explain the
life settlement process. For a description of the life settlement
process and a discussion of the pros and cons of life settlements, also
see the PA
Elder, Estate and Fiduciary Law Blog (Sept. 21, 2007). And see
J. Alan Jensen's and Stephan R. Leimberg's, "Stranger-Owned Life
Insurance," ACTEC Journal, Fall 2007, at p. 110, and James C.
Magner & Stephan R. Leimberg's, "Life Settlement Transactions: Important
Tax and Legal Issues to Consider," Estate Planning (April
2007).
(continuation of article)
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(continuation of article)
No Competitors
I am aware of no software product that is in direct competition with
Life Settlement NumberCruncher.
There are, however, two very different products in this general area:
The Life
Settlement Analyzer Life Settlement Analyzer System, furnished
by Data Life Associates, Inc. as part of their consulting support, is a
program that calculates premium funding requirements and does purchase
price analysis, including alternate life expectancies.
A free Excel-based Life
Settlement Viatical Calculator is available from FreewareBox.com. This Excel-based
spreadsheet merely estimates a life settlement value based on the basic
policy information.
While these products address the life settlement computations, neither
offers the independent level of analysis available from Life
Settlement NumberCruncher.
What's It All About?
Life Settlement NumberCruncher helps you determine the economic
viability of a proposed life insurance policy sale. (Typically, the
policy will be in an irrevocable life insurance trust, although it may
be individually owned.) The program actually illustrates the financial
benefit of retaining the policy, as opposed to selling it.
How Does It Work?
Life Settlement NumberCruncher calls for the insurance agent to
obtain a current in-force policy illustration from the insurance carrier
for the policy being analyzed. This illustration shows the policy's age,
the current policy year, the annual premiums payable, the current cash
surrender value and the death benefit (face amount). The program's
"Help" file contains comprehensive information about obtaining and
evaluating this data, including how to determine the premiums to use for
purposes of the illustration.
The program's opening screen allows you to enter your company or firm
data. Then, you are presented with two intuitive and easy-to-follow data
entry screens.
On the first screen, you enter:
Insured: The insured's name, date of birth, and current
policy age.
Policy: The insurance company name, policy number, current policy
year, current cash surrender value, current death benefit, life
settlement offer (either before or after commissions), and cumulative
premiums paid to date.
Assumed marginal tax rates: Estimated federal and state gift,
estate, ordinary income and capital gains rates.
Assumed discount rate: The rate upon which the program's net
present value calculations will be made -- typically the assumed average
rate on the client's investments.
Life expectancy assumptions: Internal Revenue Service Annuity
Table, IRS Table 90CM, the life insurance industry Table 2001
Commissioners Standard Ordinary Mortality Table, and the life expectancy
assumptions used by the life settlement provider (if obtainable).
The second data entry screen has columns for entering annual premiums to
be paid on the policy; the anticipated annual taxable gift portion of
each of these premiums; and the insurance death benefit for each year of
the insured's remaining life. The program requires that columns, such as
premiums for a number of years, be filled in. There's a helpful autofill
feature, which allows you to enter an amount once; the program then
automatically fills the column below where the amounts are identical.
The program next presents three screens of calculations:
(1) The first calculation screen reflects computation of the income tax
on the proposed life settlement alternatives as "all ordinary income" or
"eligible for capital gains treatment," given the uncertain state of the
law on this subject. In addition, the program assumes that basis equals
the cumulative premiums paid to date, although the user is given the
ability to change the policy basis by modifying the entry of the
cumulative premiums paid.
(2) The second calculation screen determines the net life settlement
value of selling the policy after income and estate taxes (if
applicable), again assuming all ordinary income and capital gains
alternatives.
(3) The third calculation screen determines the intrinsic economic value
of retaining the policy until the insured's death. It is a table that
reflects the data input for each year of the insured's remaining life
beginning with the current policy year, the total annual outlay on the
policy, the net present value of these policy outlays, the insurance
death benefit after taxes for each year, and the net present value of
the insurance death benefit for each year. All of these factors enter
into the calculation of the intrinsic economic value of retaining the
policy for each remaining year of the insured's life. This table
highlights the years that correspond to the life expectancy assumptions
previously entered.
The results screens assume: (a) all ordinary income and (b) capital
gains eligibility reflecting the crossover point when the sale of the
policy is considered economically viable.
The final screen is a clear, easy-to-follow line graph that charts the
economic gain or loss from the life settlement over time (the insured's
age, the calendar year and the policy year). It displays the crossover
point at which the policy's sale becomes beneficial. It also allows you
to toggle among various assumed tax characterizations and discount
rates.
For a printed report, you can print out either individual screens or all
program screens. The screens are printed exactly as displayed on your
computer.
Detailed operational help and background information is available for
each screen merely by clicking on the "Help" button on the screen. A
useful frequently–asked–questions (FAQs) page is included,
which explains the program's methodology and the concepts it addresses.
The FAQs may be copied to the Windows Clipboard and pasted to your word
processing program for use in your client report.
Clicking on "Technical Support" brings up an email support request that
you may transmit directly to The Weinberg
Group.
(continuation of article)
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(continuation of article)
Where Do You Get It?
Life Settlement NumberCruncher is described on Leimberg.com at www.leimberg.com/products/software/LSNC.asp.
It costs $299 and is available by either mail delivery or electronic
download. Updates are available free of charge.
You may purchase the software by contacting the publisher at:
Leimberg Associates, Inc. and Leimberg & LeClair, Inc.
144 West Eagle Road
Havertown, PA 19083
Phone: (610) 924-0515
Fax: (610) 924-0514
www.leimberg.com/products/software/
Bottom Line
This program is a specialized tool to address potential life settlement
situations that may arise. Sometimes, a life settlement is appropriate.
Certainly, if the federal estate tax exemption increases, life insurance
policies that have outlived their usefulness may become the subjects of
life settlements. Once the life settlement issue comes up in your
practice, you need to grasp the math and economics involved, if you are
to best serve your client. Life Settlement NumberCruncher will
help you meet this goal.
Trusts & Estates magazine is pleased to present the monthly
Technology Review by Donald H. Kelley -- a respected connoisseur of
the software and Internet resources wealth management advisors use to
further their practices.
Kelley is a lawyer living in Highlands Ranch, Colo. and is of counsel
to the law firm of Kelley, Scritsmier & Byrne, P.C. of North Platte,
Neb. He is the co-author of the Intuitive Estate Planner
Software, (Thomson-West 2004). He has served on the governing boards
of the American Bar Association Real Property Probate and Trust Section
and the American College of Tax Counsel. He is a past regent and past
chair of the Committee on Technology in the Practice of the American
College of Trust and Estate Counsel.
Trusts & Estates has asked Kelley to provide his unvarnished opinions
on the tech resources available in the practice today. His columns are
edited for readability only. Send feedback and suggestions for articles
directly to him at dhkelley@qwestoffice.net.
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