BEING A TAX GUY, the most common questions I get from owners of privately held businesses are about estate planning — transferring their business and wealth to the next generation. The second most common question is what to do with their money. I feel sorry for them sometimes. These guys make a bunch of money running their businesses and then lose it in the market.
The stock market is uncertain. Often net losses exceed net gains. So-called traditional safe investments — CDs, treasury bonds, municipal bonds and the like — offer only paltry returns.
Is there an investment that can match the potential high returns of successful stock market investors, yet has the prime characteristic (no-risk) of traditional safe investments? Yes!
Chances are you have never heard of this investment. Life settlements are sometimes called senior life settlements and often called a transferable insurance policy or TIP. The best way to understand how a TIP (TIPs is plural) works is by an example.
To start off with, the owner of an insurance policy has to be 65 or older and the value of the insurance policy has to be more than $200,000.
Joe, 68, owns a life insurance policy with a $500,000 death benefit and a $ 60,000 cash surrender value. Joe would like to stop paying premiums. Of course, he can cancel the policy and get the $60,000 CSV from the insurance company.
But Joe isn't happy with the $60,000 and wants to get more. There are brokers and investments groups who put together TIPs. They'll examine Joe's application, especially his medical history, and try to figure his life expectancy.
That affects how much the investors will pay Joe for his policy. The period should be four to six years; the shorter the better for the investors.
An investor (really a group of investors) buys Joe's policy for $150,000, paid in cash to Joe immediately. The investors now own the policy. The investors will receive the $500,000 death benefit when Joe dies. The investment group makes a $350,000 profit, minus whatever they have to pay later in premiums to keep the policy active.
Let's say you are one of the investors. You invest $100,000. You will wind up with a diversified portfolio of TIPs. One of the TIPs will be a fractional interest in Joe's $500,000 policy, say 3%, or $15,000.
Joe's TIP will pay you exactly $15,000 (includes your principal — amount invested — and profit) when Joe dies.
The insurance companies love people like Joe when they terminate their policies, and why not? Statistically, the insurance companies know that 92% of insurance policies will be terminated and never have to pay off. The insurance company pays a mere $60,000 for the CSV and is off the hook for a $500,000 death benefit.
Insurance companies, on the other hand, hate TIPs. Terminated policies are highly profitable for insurance companies. Of course, they want to keep the entire life-settlement industry a secret. Why? Because investors — like you — now have found a simple and easy way to help the Joes of the world and at the same time stand tall in the profit shoes of the insurance companies. Neat!
As a TIP investor you can enjoy:
- An average rate of return of 16.28% per year;
- Not worrying about the market being volatile or whether it goes up or down;
- The guaranteed return of your principal, as well as your profit; and
- Best of all, keep 100% of the profit because there are no fees or costs when you buy a TIP.
What are the tax consequences of your TIP profits? There are only two simple rules: The tax on your profit is deferred until you actually receive your principal and profit, and your profit is taxed as ordinary income.
Even the big-hitter investors are buying life settlements. Following is a quote from the May 18, 2005, issue of the Wall Street Journal headlined, "Moving the Market ...":
"AIG [American International Group, the insurance giant] has bought less than 1,500 policies since 2001. ... A few years ago, Berkshire Hathaway, the investment vehicle of billionaire investor Warren Buffett, began buying life settlements, according to securities filings."
Ask your professional adviser to check out senior settlements for your own personal investments and qualified plan funds.
The company offering the senior settlements/TIPs discussed in this column is a public company, trading on the NASDAQ. The average rate of return on investments has been 16.28% per year throughout the company's 14 years of operating history.
If you want to make a killing on your investments, this is not for you. But if a set rate of return, with no market risk is of interest to you (or your IRA, 401[k] or other qualified plan), fax me (847/674-5299) your name, address, phone numbers (business/home/cell) and estimated amount to invest (the minimum is $50,000).
Irving Blackman is a partner in Blackman Kallick Bartelstein, 10 S. Riverside Plaza, Suite 900, Chicago, IL 60606; tel. 312/207-1040, or via e-mail at [email protected]