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Insurance Abstract
A premium financing method and a non-recourse loan product using
life insurance policy as only collateral for a non-recourse loan.
The proceed of the non-recourse loan being used to pay the premium
of the life insurance policy. The non-recourse loan product can
use a new or an existing life insurance policy of the insured to
provide reverse life settlement.
Insurance Claims
What is claimed is:
1. A method for financing the premium of a life insurance policy,
comprising the steps of: qualifying a prospective insured for premium
financing based on an insured's financial and medical information;
financing the premium of said life insurance policy using said life
insurance policy as only collateral for a non-recourse loan; assigning
said life insurance policy as a collateral to a credit facility
providing said non-recourse loan; and paying the premium of said
life insurance policy using the proceeds of said non-recourse loan.
2. The method of claim 1, wherein said life insurance policy is
an existing life insurance policy of said insured; and further comprising
the step of providing a reverse life settlement of said existing
life insurance policy.
3. The method of claim 1, further comprising the steps of determining
a premium and a face amount of said life insurance policy for a
qualified insured and issuing said life insurance policy in the
name of said qualified insured.
4. The method of claim 1, wherein the step of qualifying comprises
the step of determining said prospective insured's ability to repay
said non-recourse loan based on the value of said life insurance
policy at a loan term using predictive arbitrage.
5. The method of claim 1, wherein the step of qualifying comprises
the step of determining the age, medical and financial condition
of said prospective insured.
6. The method of claim 5, wherein the step of qualifying comprises
the step of qualifying said prospective insured as said qualified
insured if said prospective insured has at least one of the following
attributes: over 70 years old with an adverse medical condition,
a life expectancy of 180 months or less, and assets valued in excess
of one million dollars.
7. The method of claim 1, further comprising the step of pooling
life insurance policies and non-recourse loans of qualified insured
into a portfolio.
8. The method of claim 1, further comprising the step of terminating
said assignment of said collateral by satisfying said non-recourse
loan by said qualified insured or a beneficiary.
9. The method of claim 1, further comprising the step of selling
said life insurance policy at the end of a loan term in a life settlement
market to satisfy said non-recourse loan.
10. The method of claim 1, further comprising the step of said
qualified insured waiving rights to said life insurance policy,
thereby transferring the ownership of said life insurance policy
to said credit facility.
11. The method of claim 1, further comprising the step of satisfying
said non-recourse loan with the proceeds of said life insurance
policy upon the death of said qualified insured during the term
of said non-recourse loan.
12. A premium financing non-recourse loan product, comprising:
a life insurance policy in the name of a insured or trust, said
life insurance policy having a face amount and a premium; and a
non-recourse loan for financing said premium of said life insurance
policy using said life insurance policy as only collateral for said
non-recourse loan in accordance with said insured's financial and
medical information, and proceeds of said non-recourse loan being
used to pay the premium of said life insurance policy; and wherein
said life insurance policy is assigned to a credit facility providing
said non-recourse loan as a collateral and paying the premium of
said life insurance policy using the proceeds of said non-recourse
loan.
13. The premium financing non-recourse loan product, wherein said
life insurance policy is an existing life insurance policy of said
insured or trust; and further comprising the step of providing a
reverse life settlement of said existing life insurance policy.
14. The premium financing non-recourse loan product, wherein said
life insurance policy is a new insurance policy issued to said insured
or trust.
15. The premium financing loan product of claim 12, wherein a loan
amount of said loan is determined in accordance with said insured's
ability to repay said loan and the value of said life insurance
policy at a loan term using predictive arbitrage.
16. The premium financing loan product of claim 12, wherein said
life insurance policy is issued to said insured having at least
one of the following attributes: over 70 years old with an adverse
medical condition, a life expectancy of 180 months or less, assets
valued in excess of one million dollars, such that said life insurance
policy is marketable in a life settlement market.
17. A method for administering a premium financing non-recourse
loan product, comprising the steps of: financing a premium of said
life insurance policy using a life insurance policy as only collateral
for a non-recourse loan based on said qualified insured's financial
and medical information; assigning said life insurance policy as
a collateral to a credit facility providing said non-recourse loan;
and paying the premium of said life insurance policy using the proceeds
of said non-recourse loan.
18. The method of claim 1, wherein said life insurance policy is
an existing life insurance policy of said insured; and further comprising
the step of providing a reverse life settlement of said existing
life insurance policy.
19. The method for administering a premium financing loan product
of claim 17, wherein the step of financing comprises the step of
determining said qualified insured's ability to repay the loan based
on the value of said life insurance policy at loan term using predictive
arbitrage.
20. The method for administering a premium financing loan product
of claim 19, further comprising the step of satisfying said non-recourse
loan by one of the following: said insured or a beneficiary of said
life insurance policy; selling said life insurance policy at the
end of a loan term in a life settlement market; or waiving rights
to said life insurance policy by said insured, thereby transferring
the ownership of said life insurance policy to said credit facility.
Insurance Description
RELATED APPLICATIONS
[0001] This application claims priority to the U.S. Provisional
Application Ser. No. 60/558,875 filed Apr. 2, 2004, which is incorporated
by reference in its entirety.
BACKGROUND OF THE INVENTION
[0002] The present invention relates to a premium financing method
and loan product using life insurance policies and a method for
administering same, more particularly to a non-collateralized-based
premium financing method and non-recourse loan product using life
insurance policies as asset backed collateral and a method for administering
same.
[0003] It is estimated that hundreds of thousands of high-net-worth
seniors possess unused insurance capacity. As individuals age and
their net worth presumably increases, there is a greater likelihood
that the insurance policies issued earlier in their lives provide
less coverage than most professional financial planners would recommend.
Until now, high-net-worth seniors, particularly seniors over 70
years of age and suffering from one or more adverse medical conditions,
have had very little opportunity to change this situation and maximize
their insurance capacity or potential death benefits.
[0004] The cost of new high face value life insurance policies
for such individuals is often expensive, even for the affluent,
and there is often a reluctance to tie up financial resources in
paying large premiums on such policies. Additionally, seniors' liquidity
situations may be very unclear or in flux due to a variety of complex
personal, estate settlement and/or business ownership circumstances.
In general, the financial burden or near-term liquidity concerns
limit the ability to maximize unused capacity.
[0005] Currently, the insured has very little opportunity to maximize
his or her insurance capacity or potential death benefits without
incurring significant cost. The premium payments for maximum insurance
coverage are generally onerous and costly for most insured. The
insured can either underutilize their insurance capacity or pledge
their liquid assets as collateral to borrow funds to pay for these
costly premiums. Typically, the insured must borrow funds against
the premiums and pledge asset(s) equivalent in value to back the
borrowed funds or sums of money. The borrowed funds are generally
subject to a call provision. Additionally, the principal and interest
can be due at time certain (or uncertain) creating a burden on the
owner/insured. Thus, most insured currently do not fully utilize
their insurance capacity.
[0006] The pledged assets are typically liquid assets, thereby
effectively freezing these liquid assets and making them less liquid.
It is appreciated that pledging such assets can create havoc to
the owner/insured upon a call or repayment. Any downturn in the
owner/insured's assets (such as a stock market downturn or bear
market) can potentially trigger a call, wherein the insured's inability
to repay the borrowed fund can create a potential foreclosure situation.
It is not uncommon, particularly in economic downturn, for many
insurance policies to be on the verge of surrender or sale because
the pledges can no longer be fulfilled with easily available liquid
assets.
[0007] Therefore, it is desirable to provide a method and product
for financing insurance policies without pledging assets of the
insured, thereby avoiding the problems noted hereinabove. The present
invention advantageously enables the insured/owner to maximize their
insurance capacity without locking up their liquid assets. This
additionally provides the insured with more flexibility with their
financial, retirement, charitable giving and estate planning.
SUMMARY OF THE INVENTION
[0008] It is therefore an object of the present invention to provide
a premium financing method and loan product using life insurance
policies as asset backed collateral (or "LIF" loan product),
and a method for administering the LIF loan product. With the policies
themselves serving as the only collateral for the non-recourse loans
and the reduction of burdensome up-front costs for new life insurance
policies, prospective borrowers are able to purchase valuable life
insurance coverage with minimal upfront dedication of personal capital.
[0009] In accordance with an embodiment, the present invention
utilizes the actual policy as the collateral for the financing.
The present invention utilizes a form of predictive arbitrage to
determine and qualify the insured for such premium financing. This
form of predictive arbitrage can utilize known or proprietary evaluation
models to determine the value of the insurance policy at the end
of the term (the termination value) and insured's ability to repay
the non-recourse loan based on the termination value of the policy.
The predictive arbitrage of the present invention can use insured's
financial ability, health status, future marketplace value of the
policy, etc. to determine the termination value of the insurance
policy and insured's ability to repay the non-recourse loan.
[0010] The present invention advantageously enables the lender
to financially underwrite the insurance policy using predictive
arbitrage. For example, arbitrage opportunities can occur when policies
written for older adults are influenced by marker forces which include
insurance companies' near-term objectives regarding new policy,
new premium volume, and different pricing criterias. Hence, policies
are competitively shopped in the marketplace and placed advantageously
with a carrier willing to underwrite the insured's impaired health
and age at extremely favorable rates. Additional factors affecting
pricing on policies include: the fact that insurance companies may
interpret the seriousness of various medical conditions differently;
the internal rate of return (IRR) requirements and investment risk
parameters of insurance companies vary industry wide; the classification
of the insured for pricing purposes, the insurance company's internal
mortality, lapse, and retention values.
[0011] In accordance with an embodiment, the present invention
as aforesaid provides the owner/insured with a low-cost option on
life insurance policy while retaining value and benefits associated
with whole, convertible term and/or universal life insurance policy
for the insured. This allows a low-cost coverage while providing
death benefits to the owner/insured. Additionally, the owner/insured
can reassess at the end of the term his or her options as to the
insurance policy and its value to him or her.
[0012] In accordance with an embodiment, the present invention
as aforesaid also enables the insured/owner to use the present invention
as a financial tool to create a reverse life settlement on any existing
life insurance policies. The end result is that the insured is paid
a certain sum payment for their policies with the added benefit
of the policy being financed to a time certain period or to the
maturity of the insured. The financing of existing policies allows
the insured to continue to receive a scaled death benefit in allowing
the life insurance policy to kept in force. The insured thus has
varying options of receiving payment as a lump sum or on an installment
basis while the program provider continues to pay future premiums.
The insured/borrower has the option of a: (a) time certain loan
date for payment of the amounts loaned, or (b) a guaranteed financing
of the premiums with the loan date maturity occurring on the death
of the insured. The insured thereby receives a certain guaranteed
payment while in effect keeping his policy and any death benefit
in-force (less the amounts due per the loan agreement upon the maturity
of the loan or death of the insured).
[0013] In accordance with an embodiment, the present invention
as aforesaid enables the insured/owner to use the present invention
as a financial tool to obtain and/or create value for his or her
insurance policy. The end result is that the owner/insured has obtained
the benefit from maximum insurance coverage or capacity without
incurring a substantial financial burden. Additionally, the insured
has shifted future premium payments and mortality risk to the lender.
That is, the insured has distributed the cost factor risk to the
lender, i.e., the future payment obligations are borne by the lender.
Further, the insured has distributed the lock-in risk to the lender.
The insured is not locked-in or "stuck" with any unwanted
or inflexible insurance policy. This may occur because the insured's
status or needs may change over time, e.g., family matters, financial,
estate considerations, etc.
[0014] In accordance with an embodiment of the present invention,
the insured are high-net-worth seniors, particularly those over
70 years old and with one or more adverse medical conditions. It
is estimated that approximately 80% of high-net-worth seniors have
unused insurance capacity and qualify for increased life insurance
coverage. Previously, high-net-worth-seniors were largely unable
to convert such capacity into a financial asset and wealth-building
tool. The present invention alters these dynamics and allows high-net-worth
seniors to participate in the life insurance market.
[0015] In accordance with an embodiment of the present invention,
a premium financing non-recourse loan product (LIF loan product)
comprises a life insurance policy having a face amount and a premium
that is issued in the name of a insured, and a non-recourse loan
for financing the premium of the life insurance policy whereby the
life insurance policy is the only collateral used for the non-recourse
loan. The loan terms are determined in accordance with the insured's
financial and medical information and the proceeds of non-recourse
loan are used to pay the premium of the life insurance policy. The
life insurance policy is assigned to a credit facility or program
provider providing the loan as a collateral.
[0016] In an accordance with an embodiment of the present invention,
the loan amount of the LIF loan product as aforesaid is determined
in accordance with the insured's ability to repay the loan and the
value of the life insurance policy at the end of a loan term using
predictive arbitrage. Preferably, the terms of the loan require
the insured be over 70 years old with an adverse medical condition
and have a life expectancy of 180 months or less. It is also preferred
for the insured to have assets valued in excess of one million dollars.
[0017] In accordance with an embodiment of the present invention,
a method for administering a premium financing non-recourse loan
product (the LIF loan product) comprises the steps of determining
the premium and a face amount of a life insurance policy for a qualified
insured and financing the premium of the life insurance policy using
the life insurance policy as the only collateral for a non-recourse
loan. The non-recourse loan is based on the qualified insured's
financial and medical information. The insured assigns the life
insurance policy as a collateral to a credit facility providing
the non-recourse loan and the proceeds of the non-recourse loan
is used to pay the premium of the life insurance policy. Preferably,
the step of financing comprises determining the qualified insured's
ability to repay the loan based on the value of the life insurance
policy at loan term using predictive arbitrage. In accordance with
an aspect of the present invention, the terms of the loan require
the insured be over 70 years old with an adverse medical condition
and have a life expectancy of 180 months or less. It is also preferred
for the insured to have assets valued in excess of one million dollars.
[0018] In accordance with an embodiment of the present invention,
the administering method as aforesaid additionally comprises the
step of issuing the life insurance policy in the name of the qualified
insured.
[0019] In accordance with an embodiment of the present invention,
the non-recourse loan will be satisfied by one of the following:
the insured or a beneficiary of the life insurance policy satisfying
the non-recourse loan to the credit facility; selling the life insurance
policy at the end of a loan term in a life settlement market; or
the insured waiving rights to the life insurance policy, thereby
transferring the ownership of the life insurance policy to the credit
facility.
[0020] The foregoing has outlined rather broadly the features and
technical advantages of the present invention in order that the
detailed description of the invention that follows may be better
understood. Additional features and advantages of the invention
will be described hereinafter which form the subject of the claims
of the invention. It should be appreciated by those skilled in the
art that the specific concepts and embodiments disclosed may be
readily utilized as a basis for modifying or designing other structures
for carrying out the same purposes of the present invention. It
should also be realized by those skilled in the art that such equivalent
constructions do not depart from the spirit and scope of the invention
as set forth in the appended claims. The novel features which are
believed to be characteristic of the invention, both as to its organization
and method of operation, together with further objects and advantages
will be better understood from the following description when considered
in connection with the accompanying figures. It is to be expressly
understood, however, that each of the figures is provided for the
purpose of illustration and description only and is not intended
as a definition of the limits of the present invention.
BRIEF DESCRIPTION OF THE DRAWINGS
[0021] The following detailed description, given by way of example,
and not intended to limit the present invention solely thereto,
will be best be understood in conjunction with the accompanying
drawings:
[0022] FIGS. 1A-1B depict a flow chart describing the premium financing
process in accordance with an embodiment of the present invention;
and
[0023] FIG. 2 is a diagram detailing the relationship between parties
in financing and administering the LIF loan product in accordance
with an embodiment of the present invention.
DETAILED DESCRIPTION OF THE EMBODIMENTS
[0024] In accordance with an embodiment of the present invention,
the method is a non-collateralized based program allowing for a
2-5 year premium financing using only life insurance policies as
asset backed collateral (or "LIF" loan product). In accordance
with an aspect of the present invention, the inventive method incorporates
a financial and insurance underwriting based on insured/owner's
financial and insurance capacity. The inventive product and method
can utilize a known or proprietary insurance arbitrage to create
a predictive program enabling the credit facility to determine and
lend funds to a qualified borrower. The qualified borrower uses
the borrowed funds or proceeds of the non-recourse loan to pay life
insurance premiums.
[0025] The present invention is based on risk analysis or distribution
of risk from the insured to the program provider. The insured can
fully utilize his or her insurance capacity without incurring substantial
financial burden or risk. The program provider lowers the cost or
risk option to the insured in exchange for certain back-end value
associated with the insurance policy. The program provider absorbs
the insured's risks by its ability to create a value based arbitrage
model and build ROI (return on investment) based on the back-ended
value of the life insurance policy and deferred interest payment
on the non-recourse loan.
[0026] In accordance with an embodiment of the present invention,
the non-recourse loan product and method comprises the following
aspects:
[0027] 1. A step by step insurance underwriting process which effectuates
the insurance analysis. Based on the specialty expertise of the
Credit facility or program provider, the insured can shop for the
best insurance in the insured's class.
[0028] 2. Financially underwriting the insured and the policy,
thereby enabling the Credit facility to assess and analyze the value
of the policy and its ability to recover any amounts loaned out.
[0029] 3. Medically underwriting the insured by utilizing an independent
medical opinion, such as AVS, 21.sup.st Services, etc., as to life
expectancy in addition to internal evaluation of the insured. This
advantageously enables the present invention to effectively assess
the risk-arbitrage components, which can be used to determine the
value of the policy at the end of term and at any fixed point in
time, including maturity.
[0030] 4. Utilization of a Portfolio theory to generate a broad
model of future ability to pay, future value, maturity, and revenues
derived from such portfolio of premium financed life insurance policies.
Accordingly, the present invention underwrites each case or policy
as a function of an over-all approach (that is among the portfolio
of policies, money will be made and lost on some policies, some
policies will be surrendered, the non-recourse loan will be repaid
on some policies, etc.).
[0031] Based on the above, the insured gets the ability to not
only have low-cost insurance, but also the potential to derive value
on their policy at the end of the term.
[0032] Turning now to FIG. 2, which illustrates various interactions
between several entities involved in establishing the program of
the present invention, the program provider 1000 can deal directly
with all parties. For example, the program provider 1000 can meet
with the client/borrower/insured 1200 to discuss and implement the
program of the present invention. The program provider 1000 can
also deal with an agent 1100 that represents the client/borrower/insured
1200.
[0033] The program provider 1000 obtains bids from insurance companies
1500 for the client/borrower/insured 1200. The program provider
1000 supplies financial and insurance information to underwriters
1300 who analyze and determine whether the client/borrower/insured
1200 qualifies for the loan product of the present invention. The
program provider 1000 also deals with the lender 1400 who issues
the loan product of the present invention and the life settlement
broker 1600 who attempts to secure the best possible price for the
sale of the life insurance policy at the end of the term of the
loan.
[0034] The Program
[0035] In accordance with an embodiment of the present invention,
the program provider, such as Capital Credit Group, Inc. provides
a credit facility to allow for the financing of premiums on life
insurance policies. By assessing the needs of the individual client,
the program of the present invention provides new financial tools
for use by the client, whereby, for example, the client can borrow
funds necessary to maintain the required premiums on a life insurance
policy. The program is customizable and flexible as to terms to
suit the clients' needs. The life insurance policy is used as minimum
sufficient collateral against the non-recourse loan, thereby allowing
the insured to take full advantage of the amount of life insurance
they can deploy without the costs. The present invention allows
the policy owner to maximize their insurance capacity and provides
tremendous add-on value to their financial assets.
[0036] The policy owner retains ownership of the insurance policy
during the term of the non-recourse loan with various options at
the end of the term of the loan. The policy owner can maximize any
asset value for the policy. The program provider can also assist
the policy owner in getting maximum value and benefits for their
policy at the end of the term.
[0037] The program of the present invention is designed for those
qualifying insureds who show the need and capacity to underwrite
policies necessary for their financial and estate planning needs.
For example, the target client group is those who have a need to
create a low cost option which allows for financial flexibility
in carrying a Life Policy. The present invention enables the insured
can use the net loan proceeds and premiums for other more immediate
financial needs. Accordingly, the present invention provides the
insured with a low cost method of maintaining life insurance, while
allowing for financial planning to a future point in time when there
is more visibility and time-value as to the insured's needs for
such a life insurance policy. In accordance with an embodiment of
the present invention, an affiliation with operating Trust companies,
such as a South Dakota Trust Administrator can be used to oversee
any Trust set-up and maintenance.
[0038] The LIF products of the present invention are designed to
capitalize on the varying underwriting standards historically endemic
to the life insurance industry. Although insurance companies develop
and apply strict, underwriting standards, they also often cope with
fluctuating internal pressures to sell policies and generate near-term
income.
[0039] Arbitrage opportunities can occur when policies written
for older adults (in this case older seniors with medical issues)
are influenced by insurance companies' varying market force which
allows a competitive premium underwriting environment. It is appreciated
that the arbitrage phenomenon enhances the program provider's business
opportunity, as are brought to the market and placed with an insurer
that is willing to issue, at extremely favorable rates.
[0040] How the Program Works
[0041] In accordance with an embodiment of the present invention,
the insured generally has the option of electing a 2-5 year premium
financing. The present invention customizes the terms and conditions
of the non-recourse loan for each client, thereby allowing tremendous
flexibility. Pricing of the program of the present invention is
based principally on the size of the insurance policy and the term
of the non-recourse loan selected. For example, the insured can
elect to finance the premiums for a predetermined period, such as
a two year premium finance with a renewal option. In accordance
with an embodiment of the present invention, the program provider
upon renewal will pre-pay and loan out future premiums for the renewal
term. It is appreciated that the renewal term will extend out an
additional term for the same term years as the original term. Such
a renewal option, which is generally applied for at the time of
the original loan term, can incur an additional prepayment fee,
e.g., 1% per year prepayment of the amount loaned.
[0042] In accordance with an embodiment of the present invention,
the premiums are pre-paid into the policy by the program provider
utilizing a note and a collateral assignment of the policy to secure
the note. It is appreciated that no other means of collateral is
required. In accordance with an aspect of the present invention,
the insured pays a contingent right fee, e.g., a predetermined percentage
of the face value (depending on the terms) which is deferred and
made a part of the loan. In accordance with another aspect of the
present invention, the insured also pays interest on the amount
loaned at a predetermined fixed or variable rate (pegged to the
AFR rates as issued by the Internal Revenue Service), of which a
certain portion, e.g., 0.5-3%, is preferably prepaid. The remaining
percentage is deferred interest, payable at the end of the term
of the policy.
[0043] In accordance with an exemplary embodiment of the present
invention, the insured can prepay the non-recourse loan after a
predetermined period, e.g., one year (pro-rated penalty for such
prepayment). In accordance with an aspect of the present invention,
the insured pays a service or loan origination fee based on the
predetermined percentage, e.g., 5%, of the amount loaned which is
preferably deferred and made a part of the non-recourse loan.
[0044] In accordance with an embodiment of the present invention,
once an insured policy is selected from life insurance policies
and acceptable terms for the non-recourse loan are reached between
the insured/policy owner and the program provider, the insured reviews
and signs a Term Sheet reflecting the loan terms and conditions.
After final terms and conditions of the premium financing are established,
it can be submitted to the policy owner and/or insured for review
by their advisor. In accordance with an embodiment of the present
invention, the insured provides the lender with documents necessary
for proper closing of the non-recourse loan, including collateral
assignment and other documents necessary to effect any obligations
at the end of the term of the loan. At closing in according with
an embodiment of the present invention, the insured/borrower pays
the up-front interest component and the processing fee.
[0045] In accordance with an embodiment of the present invention,
the LIF products are available through independent financial planners,
insurance brokers and other financial services professionals. The
following are exemplary LIF loan products of the present invention:
a) LIF 2: a fixed, twenty seven month life insurance premium financing
commitment, b) LIF 3: a fixed, three year life insurance financing
commitment, c) LIF 4: a fixed, four year life insurance premium
financing commitment; and d) LIF Reverse: a combination life settlement
payment with a fixed certain or till maturity premium financing
commitment. The program provider pre-pays annual premiums to the
insurer for the entire term of the LIF loan, thus guaranteeing the
borrower/insured coverage throughout the term of the loan.
[0046] Collection and Repayment Options
[0047] At the end of the term of the loan, the insured has several
options. In accordance with an embodiment of the present invention,
the insured can repay the loan principal, the Contingent Rights
Fee (e.g., approximately 3-8% of policy's face value determined
by several factors that can include life expectancy, premium levels,
the term of the LIF loan, etc.) and all loan origination and service
fees. The insured or borrower buys out the program provider's contingent
rights to the policy and becomes the full owner of the policy after
repayment of the loan and the Contingent Rights Fee. In accordance
with an embodiment of the present invention, the beneficiary of
the policy can repay all such amounts due to the program provider,
such as the principal, Contingent Rights Fee, loan origination and
service fees. Hence, the beneficiary will become the full owner
of the policy.
[0048] In accordance with an embodiment of the present invention,
the insured/borrower can request the sale of the insurance policy
in the life settlement market. Proceeds from the successful sale
of the insurance policy are used to repay the loan and the Contingent
Rights Fee, with the insured/borrower entitled to any excess proceeds.
In accordance with an embodiment of the present invention, the insured
pays a market-rate commission for arranging the sale of the policy
to the program provider or its agent.
[0049] In accordance with an embodiment of the present invention,
the insured/borrower can choose not to repay the non-recourse loan.
In this case, the borrower/insured sells the policy to the program
provider for a nominal amount, i.e., $1.00 plus the assumption of
the amount financed. If the policy cannot be sold for more than
the total amount due (principal plus interest and fees), the insured/borrower
is not obligated to repay the loan and can "walk away"
after enjoying low-cost, high value life insurance coverage for
the term of the non-recourse loan. That is, the insured/borrower
can "walk away" from the loan obligation because the pricing
structure of the LIF loan product of the present invention has,
in effect, created a situation in which the insured/borrower has
obtained two years or more worth of coverage at little cost to the
insured. The increase in the value of the life insurance policy
as a future life settlement over the loan period has been essentially
financed by the insured/borrower assuming the insurance policy can
be sold at a price sufficient to repay the amounts due under the
loans. In accordance with an aspect of the present invention, the
insurance policy is liquidated at the best price available and the
proceeds used insurance to satisfy obligations associated with the
original non-recourse loan, or the policy is kept by the program
provider as part of their life settlement portfolio until such time
as is advantageous to liquidate the insurance policy to satisfy
any obligations of the loan.
[0050] In accordance with an embodiment of the present invention,
the insured can elect an option to pay the deferred interest to
date and have the future premiums prepaid. Thus, the insured has
effectively extended the term of the policy for another cycle.
[0051] In accordance with the embodiment of the present invention,
the insured can as part of the LIF options or as an independent
transaction, the reverse life settlement of a certain payout with
the future financing of premiums and death benefits.
[0052] If, however, the insured dies during the term of the non-recourse
loan, proceeds is generated from the insurance policy and used to
pay the principal, interest and origination fees plus an early termination
fee. All remaining funds are distributed to the insured's named
beneficiary.
[0053] Life settlements, the sale of an insurance policy covering
an older adult for more than the insurance policy's cash value,
to an investor who keeps the policy alive until the death of the
person on whose life the policy covers, offer an impressive investment
opportunity when transactions are based on sound investing.
[0054] Traditionally, the life settlement buyer purchases a senior's
policy (giving the selling owner immediate cash) and then keeps
it in force until the original policy owner dies. When the policy
ultimately pays out at the insured's death, the buyer (and new owner)
receives the policy's face value. Life settlement pricing is based
mainly on the insured's estimated life expectancy, derived primarily
from individual medical life expectancy assessments performed by
independent, third party firms.
[0055] With respect to life settlements, when actual mortality
accurately reflects life expectancy estimates at the time a policy
is issued or purchased at a later date in the secondary market,
actual financial returns meet predicted returns. Returns are calculated
based on a policy's face value pay-out amount less the sum of the
life settlement amount paid to the insured and any premiums that
are paid to maintain the policy in good standing over the insured's
remaining life. A portfolio of soundly underwritten life settlements
would be expected to mature on or close to the average mean life
expectancy predictions, creating a relatively predicable financial
return.
[0056] Insurance companies develop and apply underwriting standards
to determine whether and at what face amounts and premium levels
individuals are eligible for various types of life insurance coverage.
For the most part, they use the same underwriting standards that
life settlement firms use in assessing life expectancy. However,
insurance companies also cope with industry-wide and internal pressures
to sell policies and generate near-term income.
[0057] Arbitrage opportunities as described above often occur when
policies written for older adults are driven by market forces and
influenced by differing objectives, by insurance companies' regarding
new policy and new premium volume. These industry practices which
have been ongoing for decades, enhance the program provider's business
opportunity, as policies are placed and underwritten in a very structurally
competitive and non-homogeneous environment.
[0058] The program provider works with borrowers to capitalize
on such conditions to create cases where favorable dynamics prevail,
leading to what can be expected to be profitable life settlement
opportunities when LIF products come to term and the borrowers select
a repayment option involving the sale of the policy into the life
settlement market.
[0059] Turning now to FIGS. 1A-1B, there is illustrated a flow
chart describing the premium finance process in accordance with
an embodiment of the present invention:
[0060] Application Process
[0061] An agent 1100 presents the premium financing program of
the present invention, to a potential client 1200 (i.e., policy
owner/insured) in step 100 and provides the client 1200 with marketing
materials, explaining the program and various premium financing
options available from the program provider 1000 in step 100. If
the policy owner/insurance client 1200 decides to proceed with the
premium financing of the present invention, the client 1200 fills
out an application which includes financial and medical information
in step 120.
[0062] That is, the client 1200 fills out a financial application
which includes documentation as to the client's financial status.
Also, the application can include but not limited to policy information,
documentation as to tax returns, possibly corporate returns. The
client 1200 fills out medical information forms which allow for
insurance underwriting, and fills out proper forms which allow for
an approved third-party medical evaluation.
[0063] Underwriting
[0064] The program provider 1000 underwrites both the non-recourse
loan and insurance policy. The program provider determines the life
expectancy of the client, preferably Lloyd approved life expectancy
reports. The program provider 1000, either working with client's
advisor or through its own advisors, gets the best bid available
for procurement of an insurance policy in step 130. Preferably,
the program provider 1000 selects the best bid from the top ten
life insurance companies 1500.
[0065] Underwriters 1300, preferably affiliates with the program
provider, analyze the policy and other relevant information to determine
whether to offer a term sheet for financing the premiums of the
policy in step 140. Financial and medical underwriting allows the
program provider to, through a known or proprietary evaluation model,
determine the value of the policy at the end of its term, and the
probability of such value. This allows the program provider 1000
to determine the financial or payback viability of non-recourse
loan.
[0066] In accordance with an embodiment of the present invention,
underwriting standards are established which allow program provider
1000 to work with borrowers 1200 to initiate high face value life
insurance policies that life settlement brokers can expect to find
highly marketable as life settlements at loan termination. Accordingly,
the LIF product is generally limited to individuals who:
[0067] 1) Have reached age 70+, have a life expectancy of 144 months
or less and one or more adverse medical conditions,
[0068] 2) Possess assets in excess of $1 million as the higher
the personal wealth, the greater the need for higher face value
life insurance coverage; and
[0069] 3) Have unused insurance capacity, and would benefit by
working with their advisors and the program provider to add pre-selected
insurance assets consistent or proportionate with their financial
situation that meet all requirements for a profitable sale into
the life settlement market when the non-recoverage loan comes due.
[0070] The market of eligible borrowers is significant, and will
grow larger as the U.S. population ages. With the development of
the life settlement market and the related increased awareness of
the "hidden asset" within life insurance policies, more
advisors now include life settlement alternatives in their solutions
to high net worth clients.
[0071] It is estimated that 20% of individuals who meet age and
financial eligibility criteria for the LIF product also meet the
144-month life expectancy criteria at age 70. However, with each
succeeding year, the percentage increases, as increased age brings
overall life expectancy norms to bear and a higher percentage of
seniors within the 144-month life expectancy band. Also, it is estimated
that by the time they reach age 77-80, approximately 80% would be
eligible. Accordingly, approximately 200,000 households in the US
are potentially currently eligible candidates for the LIF products
of the present invention.
[0072] When applicable, the program provider and designees will
underwrite the existing policy value in order to work with the advisor
and client to determine terms and reverse life settlement of any
existing policies.
[0073] Issuance of Policy
[0074] Once the client or insured 1200 is approved for financing,
the program provider 1000 issues a term sheet to the client 1200
which details the principal, deferred interest costs, deferred fees,
the prepayment fee, and the like in step 150. Deferred fees can
include but are not limited to an origination fee, contingent fee,
and service fees. After the term sheet is signed by the client 1200,
closing documents are prepared and the policy is preliminarily issued
in step 160. Closing documents can include a note payable, collateral
assignment, and any other documents that will allow for assignment
and subsequent re-sale of the insurance policy. Preferably, the
client 1200 also signs power of attorney documentation to allow
the program provider to carry forward with future obligations which
can include tracking and other servicing arrangements.
[0075] If the client is approved and agrees to a reverse life settlement,
the program provider 1000 will issue a term sheet to the client
1200 which detail all the payouts and costs to the client 1200.
After the term sheet, closing documents are prepared and issued.
[0076] Capital Structure
[0077] Several different Capital Structures are available for the
lending arrangement. A value based analysis allows the program provider
to utilize external or internal takeout guarantees on the lending
pool in step 170. That is, the program provider 1000 utilizes capital
structure which has probable takeout and reserve options, which
enhances value to the lender. Takeout guarantees can be based on
known or proprietary portfolio management, known or proprietary
valuation structure, and known or proprietary fee structure. Preferably,
the program facility utilizes a known or proprietary model to create
a risk-distribution model using reserves and fees to enhance and
increase the projected IRRs (internal rate of returns) in step 175.
The pool management allows for incorporating various options in
distributing value and risk.
[0078] Closing
[0079] If the application is in order, with an acceptable insurance
policy, the program provider 1000 prepares a closing package which
enters into the loan agreement with the client 1200 simultaneously
with the purchase of the policy by the client in step 180. Documents
in the closing package can include: the note and security loan agreement,
including a schedule which spells out the terms of the loan; a term
sheet of the loan transaction; the life insurance policy designating
the program provider as a collateral assignee; a copy of the application
and insurance policy; a recordation with the Insurance Company 1500
as to the acceptance of the collateral assignment on the indicated
policy; Insured, Borrower and Beneficiary acknowledgement and cooperation
as to any future obligation as to any potential life settlement
(whether as a result of a directive or a "walk away");
medical records and the third party life expectancy estimate.
[0080] In accordance with an embodiment of the present invention,
a trust administrator can be utilized to set up a trust or LLC structure.
At the behest of the insured, the trustee acts as borrower for the
loan. The documentation necessary for execution takes into account
the ability to collateralize and create ownership in the policy
on behalf of the lender. All trust documents and directives has
the program providers named as the assignee with rights to the policy.
[0081] The policy is then issued and the client (now a policy owner/insured)
1200 signs the closing documentation which includes a non-recourse
Note (collateralized only by the Policy itself). The insured 1200
prepays a portion of interest for length of loan term (a predetermined
percentage, e.g., 0.5-3%, depending on loan structure). The program
provider 1000 pays the premiums to the insurer 1500 to cover such
amounts for the length of the loan (i.e., two years of premiums,
if it is a two year loan term).
[0082] The program provider 1000 services and maintains the non-recourse
loan, as well as monitors the insured 1200 and the policy premiums
in step 190. Hence, the policy and premium finance are in effect
for the term of the contract. The program provider 1000 is obligated
to pay extra premiums if amount originally paid is not sufficient.
The program provider 1000 also provides notices for repayment at
the appropriate time on a per contract basis. Pursuant to the contract
terms, insured 1200 notifies the program provider 1000 of its plan
to exercise any of its options.
[0083] At the end of the contract term, there are several options
that the insured 1200 can exercise in step 200.
[0084] Policy Owner Options
[0085] At the end of the term, the insured 1200 can pay back the
non-recourse loan including all deferred interest and deferred fees
and become the absolute owner of the policy in step 203. At such
time, the program provider 1000 relinquishes the collateral assignment.
[0086] Alternatively, the insured 1200 can waive all rights to
the policy, which allows the program provider 1000 to enforce its
collateral assignment and become the owner of the policy in step
206.
[0087] Additionally, the insured 1200 can instruct a life settlement
broker, such as Allsettled Group, to shop the marketplace and try
to find the best value for the insurance policy in step 209. From
the net proceeds (after broker fees), any balance left after paying
off the non-recourse loan goes to the insured 1200. If the insurance
policy cannot be sold to cover the amounts due, including the Contingent
Rights Fee, this contributes to a Borrower default and the sale
of the policy to the program provider 1000 for a nominal amount,
i.e., $1.00 plus the assumption of the amount due after which the
program provider arranges for the sale of the insurance policy to
satisfy the outstanding obligations.
[0088] If, however, the insured 1200 dies during the term of the
non-recourse loan, proceeds will be generated from the insurance
policy and distributed to pay the principal, interest and origination
fees plus an early termination fee. All remaining funds will be
distributed to the insured's named beneficiary. In the event an
insured 1200 passes away, a request for a copy of the death certificate
is filed with the appropriate governmental office. Typically the
family of the insured also submits a death certificate to the program
provider 1000. The death certificate is then filed with the insurance
company 1500 and a request for a settlement of the policy is made.
The settlement status is followed up until the proceeds of the policy
are paid to the program facility and others as deemed appropriate.
It is appreciated that the insurance companies 1500 have an incentive
to pay promptly as most states require insurance companies to pay
on claims that take more than 30 days to settle.
[0089] In accordance with an embodiment of the present invention,
the LIF products feature an attractive and strategic pricing structure,
creating minimal credit risk regardless of the option chosen by
the policy-holder when the LIF loan comes to term. The LIF products
are structured to enable the program provider to derive an assortment
of cash flows on each LIF loan written, the most substantial of
which is a Contingent Rights Fee generally equal to 3% to 8% of
the face value of the policy. In addition, policy owners pay minor
up-front interest and processing fees at loan closing, and more
substantial interest payments, loan service fees, and contingent
fees when loans are repaid.
[0090] Policies Assigned to Credit Facility
[0091] The program provider 1000 creates a portfolio pool of all
policies assigned to it at the end of the loan terms in order to
manage the policies. The capital structure and guarantees provide
the program provider 1000 with various options in managing the policies.
The program provider 1000 can decide to surrender the policy for
no value in step 240, decide to keep policy and maintain policy
either until maturity or at any point in time which maximizes value
and return on investment (ROI) in step 220, or enter the marketplace
to get best possible value for the insurance policy in step 230.
[0092] Policies that are underwritten with sufficient underlying
values are ideal candidates for value in the life settlement market
by the life settlement broker as 1) the program provider 1000 has
worked with the borrower 1200 to secure a policy that could possibly
be sold in the life settlement market, and 2) life expectancy, the
primary pricing variable of a life settlement is more predictable
in the cases of elderly seniors with some adverse health, allowing
the program provider 1000 (in conjunction with the life settlement
broker excellent visibility as to the eventual sale price of the
policy). It is expected that sales of policies underlying the LIF
products will occur in approximately 80% its LIF loan transactions.
[0093] In accordance with an embodiment of the invention, the program
provider 1000 targets seniors (age 70 or more) as clients, which
has one or more adverse medical conditions and a life expectancy
of 180 months (15 years) or less. Arbitrage opportunities and life
settlement pricing are enhanced for older seniors with medical conditions.
A policy owner/insured 1200 with assets valued in excess of $1 million
and has unused insurance capacity would benefit from the present
invention. The present invention provides these older seniors with
an opportunity to add insurance assets consistent or proportionate
with their financial status. Furthermore, the program provider 1000
works with the insured's advisors 1100 to identify and judiciously
selects an insurance policy from a competitively "shopped"
insurance policy that provides the basis for value of the insurance
policy, when sold to repay the non-recourse loan at the end of the
term.
[0094] The following is an exemplary loan structure in accordance
with an embodiment of the present invention, a seventy five year
old borrower 1200 with an adverse medical condition and net worth
in excess of $15 million seeks $10,000,000 in life insurance coverage
(universal or term) and wants to finance the premiums with a fixed
27 month loan. The program provider assists the borrower 1200 in
identifying a $10 million face value policy for purchase, with annual
premiums of approximately $500,000, translating to $1,125,000 over
a 27-month (2.25 year) term. The program provider 1000 lends the
policy owner (borrower 1200) the following amounts: upfront payment
of premiums of $1,125,000; origination and administrative fees of
approximately 5% of the premiums financed; interest at the prevailing
AFR rate (approximately 2.92% in the example) less the up-front
interest of approximately 0.5% of the premiums financed; and a Contingent
Rights Fee of approximately $500,000 (5% of the face value of this
particular underlying policy).
[0095] At the end of twenty-seven months, the amount due on such
a non-recourse loan is approximately $1,734,575. Flexible arrangements
can extend this period another two years in some cases. Additionally,
the borrower 1200 collaterally assigns rights to ownership of the
policy to the program provider 1000 at the outset of the loan (in
the event that the borrower opts not to repay the non-recourse loan
when due.
[0096] Using the sample premium financing transaction described
above for a $10 million face value policy, high returns are evident
as summarized in Table 1.
1TABLE 1 BORROWER OPTIONS AND PRICING EXAMPLE FOR A 27-MONTH LOAN
Option Selected by Policy Holder Return on Investment 27 month loan
is repaid: policy holder $1,125,000 (premiums due over 2.25 years)
assumes full ownership of policy $56,250 (misc. fees financed -
approx. 5% of prems.) $71,702 (interest financed at 2.92% APR) $1,252,952
(total financed exclusive of CR Fee) $500,000 (CR Fee) $1,752,952
(total financed) Other amounts paid upfront by Borrower: $5,625
(interest paid upfront by Borrower) $1,500 (processing fee) Program
Provider receives $1,752,952 (the amount financed), IRR to program
provider: approximately 20%. Loan is repaid; policy is sold on policy
Same as above, holder's behalf in life settlement market Based on
a gross offer of 21% of the face value of the policy, or $2,100,000,
program provider would receive $1,752,952 (the amount financed),
life settlement broker would receive $100,000, and the Borrower
would receive $247,048 as Policyholder is entitled to excess proceeds
in excess of loan repayment. IRR to program provider: approximately
20% Loan is not repaid. Policy purchased by Policy will be marketable
at such a price as to generate Credit Facility for $1.00 proceeds
sufficient to repay all amounts due on the loan. Program provider
would expect to sell such a policy for between $1,450,000-1,750,000
IRR to program provider: approximately 10-15%.
[0097] In accordance with an embodiment of the present invention,
a premium financing non-recourse loan product (LIF loan product)
comprises a life insurance policy having a face amount and a premium
that is issued in the name of a insured, and a non-recourse loan
for financing the premium of the life insurance policy whereby the
life insurance policy is the only collateral used for the non-recourse
loan. The loan terms are determined in accordance with the insured's
financial and medical information and the proceeds of non-recourse
loan are used to pay the premium of the life insurance policy. The
life insurance policy is assigned to a credit facility or program
provider providing the loan as a collateral.
[0098] In an accordance with an embodiment of the present invention,
the loan amount of the LIF loan product as aforesaid is determined
in accordance with the insured's ability to repay the loan and the
value of the life insurance policy at the end of a loan term using
predictive arbitrage. Preferably, the terms of the loan require
the insured be over 70 years old with an adverse medical condition
and have a life expectancy of 180 months or less. It is also preferred
for the insured to have assets valued in excess of one million dollars.
[0099] In accordance with an embodiment of the present invention,
a method for administering a premium financing non-recourse loan
product (the LIF loan product) comprises the steps of determining
the premium and a face amount of a life insurance policy for a qualified
insured and financing the premium of the life insurance policy using
the life insurance policy as the only collateral for a non-recourse
loan. The non-recourse loan is based on the qualified insured's
financial and medical information. The insured assigns the life
insurance policy as a collateral to a credit facility providing
the non-recourse loan and the proceeds of the non-recourse loan
is used to pay the premium of the life insurance policy. Preferably,
the step of financing comprises determining the qualified insured's
ability to repay the loan based on the value of the life insurance
policy at loan term using predictive arbitrage. In accordance with
an aspect of the present invention, the terms of the loan require
the insured be over 70 years old with an adverse medical condition
and have a life expectancy of 180 months or less. It is also preferred
for the insured to have assets valued in excess of one million dollars.
[0100] In accordance with an embodiment of the present invention,
the administering method as aforesaid additionally comprises the
step of issuing the life insurance policy in the name of the qualified
insured.
[0101] In accordance with an embodiment of the present invention,
the non-recourse loan will be satisfied by one of the following:
the insured or a beneficiary of the life insurance policy satisfying
the non-recourse loan to the credit facility; selling the life insurance
policy at the end of a loan term in a life settlement market; or
the insured waiving rights to the life insurance policy, thereby
transferring the ownership of the life insurance policy to the credit
facility.
[0102] While the present invention has been particularly described
with respect to the illustrated embodiments, it will be appreciated
that various alterations, modifications and adaptations may be made
on the present disclosure, and are intended to be within the scope
of the present invention. It is intended that the appended claims
be interpreted as including the embodiments discussed above, those
various alternatives, which have been described, and all equivalents
thereto.
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