Life Settlement Disclosure Document Part A Read Before You Purchase We are offering to sell you an investment in a life settlement contract. A life settlement contract is an agreement for the purchase of the death benefit of a life insurance policy. When the insured dies the investor receives a specific dollar amount that will be greater than the amount paid for the contract. Some life settlement companies sell entire policies to investors, and others sell partial interests in policies. If you purchase a partial interest, the remaining interests in the policy will be sold to other investors. Investing in a life settlement contract is risky. Be aware that this type of investment may involve risks in addition to those discussed below. You should seek professional advice to help you understand the nature of this investment, the terms and conditions of any contract you are asked to sign, and the tax consequences of your decision to invest. RISKS 1. The annual rate of return on your investment cannot be calculated before the insured dies. The longer the insured lives, the lower the rate of return on your investment will be. 2. No one can accurately predict the actual life expectancy of an insured. Some factors that may affect the accuracy of a prediction are: The experience and qualifications of the medical personnel making the life expectancy prediction. 1 KY Form 10:410A July 2011 version American LegalNet, Inc. www.FormsWorkFlow.com The nature of the insured's illness and future breakthrough treatments and cures. If the insured has AIDS, the definition of AIDS used by the life settlement company. 3. You may have to pay money in addition to your initial investment. The insurance company will cancel the policy in which you have invested if periodic premium payments are not made to keep the policy in force. The insurance company will not pay the death benefit if the policy is not in force. Some of the money you invest probably will be set aside to pay premiums. However, if the insured lives longer than expected, you may be required to pay additional premiums to keep the policy in force. 4. Being a beneficiary of a policy and not also an owner carries special risks. A person who buys life insurance is the owner of the policy and decides who the beneficiaries of the policy will be ­ that is, who will receive the death benefit when the insured dies. When the policy is sold as a life settlement contract, investors frequently become the new beneficiaries and therefore are entitled to receive the death benefit when the insured dies. The new owner of the policy may be either the investors themselves or the life settlement company. Only an owner of a policy, not a beneficiary, has the right to direct who can make premium payments directly to the insurance company so that the policy will remain in force. If the funds that have been set aside to pay premiums run out, you will be dependent on the life settlement company or other entity to collect additional premium money from investors and to ensure prompt payment of premiums. If that entity goes out 2 KY Form 10:410A July 2011 version American LegalNet, Inc. www.FormsWorkFlow.com of business or otherwise fails to pay premiums, you may not be able to pay the premiums yourself if you are only a beneficiary. 5. Term insurance policies carry special risks. A term policy is issued for a specific time period. The insurance company will not pay the death benefit if the insured outlives that time period. If you purchase a term policy, you will be dependent on the life settlement company to renew the policy when the term expires. 6. Contestable policies carry special risks. The insurance company may "contest" a policy for a two-year period after its issuance if the company finds a reason to cancel the policy. The insurance company will not pay the death benefit if: the insured dies within the contestability period, and the insurance company has a reason to cancel the policy. One example of a reason that an insurance company might cancel a policy is that the insured did not truthfully answer a question on the policy application. The policy may also be cancelled if the insured commits suicide within the twoyear contestability period. 7. Group policies carry special risks. A group policy insures the members of a specific group of people, usually the employees of an employer. The biggest risk for someone who invests in a group policy is that the policy can be terminated by the employer or the insurance company. Although the policy will contain a provision allowing your interest to be converted to an individual policy, there may be limits or restrictions on the right to convert. 3 KY Form 10:410A July 2011 version American LegalNet, Inc. www.FormsWorkFlow.com Also, the insurance company may charge additional premiums once the policy is converted. 8. Investing IRA money in a life settlement contract carries special risks. Internal Revenue Code section 408(a)(3) requires that "no part of trust [IRA] funds will be invested in life insurance contracts." This means that the Internal Revenue Service may not allow you the tax benefits of an IRA if you invest in a life settlement contract. Even if such an investment is allowed, you should carefully consider your age, the life expectancy of the insured, and the difficulty in predicting life expectancy before investing IRA funds in a life settlement contract. Since death benefits are not paid until the insured dies, you may encounter a problem taking annual distributions from your IRA that are mandatory beginning at age 70½. If the funds are not available to take the mandatory distribution, the IRS will penalize you. 9. An investment in a life settlement contract is not a liquid investment. The death benefit on a life settlement contract will not be paid until the insured dies, and there is no established secondary market for life settlement contracts. This means that you will probably not be able to sell your investment in an emergency to raise money for your immediate needs. 10. Check any promises of guarantees carefully. The life settlement company from which you purchase your life settlement contract may provide a performance or fidelity bond, or another similar instrument, with your purchase. The purpose of these instruments is to "guarantee," or "insure," your investment. Ask exactly what is being guaranteed. Also ask the sales person for a copy 4 KY Form 10:410A July 2011 version American LegalNet, Inc. ww