Life-insurance policies can be resold to investors for more than just pin money. No more premiums either.

to their favorite charities. While many seniors want to include charities in the mix, they might not want or be able to tap into liquid assets to accomplish their philanthropic goals. Many donors have used life insurance as an effective strategy to magnify the effect of their contributions, and life insurance settlements can provide a significant enhancement to that strategy.

Life settlements, also known as senior settlements, enable seniors to sell unneeded life insurance policies in a secondary market for an amount greater than the cash value offered by their insurance company but less than the death benefit. Life settlements give seniors access to funds they otherwise might have lost had they surrendered their policies or, worse yet, let them lapse — outcomes that occur with nearly 80% of universal life policies according to a June 2005 report by Bernstein Research and Milliman, an insurance consulting firm.
Though producers and brokers usually use life settlements as a means of restructuring life insurance programs, investing for retirement needs, or funding long-term care needs for their clients, many have yet to realize the benefits of using them as a tool for helping certain clients financially support charities.

Charities Often Need Cash Sooner Rather Than Later
According to the most recent report issued by Foundation Center, a New York clearinghouse for information on foundations and philanthropy, United States charitable organizations are having a tough time fundraising. Cuts in government funding, combined with slow growth in private contributions and the amount of giving in response to recent natural disasters, are forcing many charities to cut back on staffing and services and, in some cases, to close their doors entirely.
Many charities can keep their doors open thanks to a volunteer base often comprised of seniors who can bring a lifetime of experience to the organization. Many of these seniors also would love to donate money but don't want to dip into their life savings.

For charities needing capital sooner rather than later, life settlements can provide an immediate supply of cash. And seniors who choose to donate also benefit — they can turn an unneeded asset into a valuable gift and realize the generosity of the gift during their lifetime.

Tax Benefits of Donating Via a Life Settlement
With tax season around the corner, many high-net-worth seniors might find it beneficial to donate the proceeds from the sale of a highly appreciated asset to charity to get a current income-tax deduction equal to the asset's fair-market value (the life settlement proceeds) rather than their lower cost basis in the asset (premiums paid) if the policy were donated.
Although state and federal tax laws vary depending on individual circumstances and IRS interpretations are subject to change, the general view is that the proceeds from the sale of a life insurance policy may be subject to three categories of tax treatment:

1. No tax liability: Settlement proceeds, to the extent equal to the owner's cost basis in the policy (sum of premiums paid by the policyholder), result in no tax liability because they are a return of capital.

2. Ordinary income: This will be generated if the policy's surrender value is greater than the cost basis above. The difference between that portion of settlement proceeds equal to the policy's surrender value and cost basis often will be treated as ordinary income as it would if the policy were surrendered to the insurance carrier for its surrender value.

3. Long-term capital gains: Settlement proceeds in excess of the surrender value or the cost basis (if surrender value is less than basis) are treated as a long-term capital gain because this is a capital asset.

• The policy must be beyond any carrier or statutory contestability period, fully renewable, and subject only to the payment of premiums;
  
  
• The insured's life expectancy must be between 25 and 168 months based on one or more medical evaluations from an approved evaluator;
  
  
• Term policies must have a minimum term life insurance coverage equal to the greater of two times the life expectancy or 10 years; and
  
  
• The face value of such policy cannot exceed $20 million.

• Solicit bids only from providers that are both experienced and ethical. Regulation of life settlements is not the same in all states, and some states do not regulate the industry at all.
  
  
• Select a life settlement company that is licensed or otherwise qualified to do business in the state in which the policyholder resides.
  
  
• Look for proven industry experience, preferably at least $1 billion in purchased aggregate face value to date.
  
  
• Confirm the company is institutionally funded and will not resell the contract to an individual investor.
  
  
• Check with the state attorney general's office or state insurance department for any complaints or legal action against the settlement provider.
  
  
• Make sure your client consults with his or her professional tax adviser.

Larry Simon is director, CEO, and president of Life Settlement Solutions, Inc. Mr. Simon also has served as the CEO and a director of the Global Life companies since their formations in 1999 to 2001. From 1972 through 1999, Mr. Simon was active in the establishment and management of the operations of other successful business ventures. Earlier in his career, he spent about four years with Deloitte and Touche Tohmatsu as an auditor and consultant.