Life Settlements The Devil is in the Details

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Wall Street Journal – Grim Risks of Reaping Death’s Rewards - 02/06/10 “Death is inevitable, but good investment returns aren’t – especially those that rest on how long people live.” “Called life settlements, these arrangements allow senior citizens to sell their policies at a discount to face value.” “As a buyer, you claim the benefits when the seller dies. Investment earnings hinge on how long the insured person lives.” “The ghoulish facts of such investing: The sooner the original policyholder dies, the better for the investor.”

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Wall Street Journal – Grim Risks of Reaping Death’s Rewards - 02/06/10

Let’s Review the Economics for the Investor “Say you purchase a $1 million policy held by an 82-year-old woman. Actuarial tables say she has five years to live.” “If you deal via Life Partners Holdings Inc., a major life settlements firm, you must pony up $540,000. The woman gets $200,000 of that; the remainder goes toward future premiums and transaction fees.”

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Wall Street Journal – Grim Risks of Reaping Death’s Rewards - 02/06/10

Let’s Review the Economics for the Investor “Should she obligingly die on time, you net a 13% annual return.” “Yet if she doesn’t shuffle off this mortal coil for 10 years and you end up forking over much more in premiums, the return sinks to 3%.” “Every extra year she soldiers on, your take shrinks.”

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Wall Street Journal – Grim Risks of Reaping Death’s Rewards - 02/06/10

Let’s Review the Economics for the 82-Year-Old Instead of the 82-year-old woman’s beneficiaries receiving $1 million when she passes away (in an estimated five years), she receives $200,000 today. Let’s look at her cost if she chose to maintain her life insurance that costs $10,000 per year (because she delayed purchasing it until she was 55-years old) versus taking $200,000 today.

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Wall Street Journal – Grim Risks of Reaping Death’s Rewards - 02/06/10

Let’s Review the Economics for the 82-Year-Old

Scenario Cost Proceeds Net Benefit Accept Life Settlement $0 $200,000 $200,000 Pay Life Insurance of $10,000 for 5 Years $50,000 $1,000,000 $950,000 Pay Life Insurance of $10,000 for 15 Years $150,000 $1,000,000 $850,000

Choosing Life Settlement means forgoing hundreds of thousands of dollars, $750,000 ($950,000-$200,000) or $650,000 ($850,000-$200,000)

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Wall Street Journal – Grim Risks of Reaping Death’s Rewards - 02/06/10

Warning Between January 2004 and July 2009 the Securities Exchange Commission took legal action against 27 U.S. Life Settlement Funds and Advisers, according to Conning Research & Consulting. Life Settlements make the Top-10 list of “Investor Traps”, says the North American Securities Administrators Association. In May 2009, the IRS ruled that death benefits received by investors should be treated as ordinary income, not as a lower-cost capital gain.

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Aaron Skloff, AIF, CFA, MBA Chief Executive Officer Skloff Financial Group

908.464.3060

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