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Insurance Abstract
The invention provides a novel method of facilitating the acquisition
of a life insurance policy on the life of an insured. The method
involves interaction among a borrower, a lender, a service provider
and a collateral agent. Using the inventive method of the present
invention, the borrower is able to acquire funds, on an non-recourse
basis, from the lender for payment of one or more premiums on the
life insurance policy with minimal impact on liquidity. The service
provider agrees to provide certain services to the borrower under
a service agreement during the term of the service agreement; the
borrower's obligations under service agreement are non-recourse.
The life insurance policy and its proceeds are held as security
for the borrower's obligations to the lender and the service provider
by a collateral agent.
Insurance Claims
1. A method of facilitating the purchase of a life insurance policy
by a borrower, the method comprising: acquiring a life insurance
policy on the life of an insured, said acquisition comprising payment
of a premium for said life insurance policy; receiving a loan of
a principal amount from a lender, wherein said principal amount
is greater than or approximately equal to the amount of said premium;
executing a non-recourse note for said principal amount in favor
of said lender; entering into a service agreement with a service
provider, said service agreement comprising a term, wherein said
service provider agrees to purchase said life insurance policy in
a private sale during a private sale period for a private sale purchase
price and wherein said borrower agrees said service provider shall
be entitled to receive a servicing fee if said insured dies during
said term; and entering into a security agreement with a collateral
agent, said lender and said service provider, wherein said collateral
agent agrees to hold said life insurance policy and any proceeds
of said life insurance policy as security for said borrower's obligations
to said lender under said non-recourse note and for said borrower's
obligations to said service provider under said service agreement,
and wherein said borrower, said lender, service provider and said
collateral agent agree said borrower shall be entitled to redeem
said life insurance policy during a redemption period for a redemption
price.
2. The method of claim 1, wherein said non-recourse note further
comprises a maturity date and provisions for accrual of interest
on said principal amount at an interest rate to said maturity date.
3. The method of claim 2, wherein said security agreement further
comprises an expiration date that is after said maturity date of
said non-recourse note.
4. The method of claim 3 wherein said non-recourse note further
comprises an effective date and wherein said maturity date of said
non-recourse note is between approximately two years and approximately
three years after said effective date.
6. The method of claim 4 wherein said expiration date of said service
agreement is between approximately fours years and approximately
six years after said effective date of said note.
7. The method of claim 1, wherein said borrower is a trust having
assets created by a grantor.
8. The method of claim 7 wherein said grantor will not be treated
as owner of any of said assets of said trust for income tax purposes.
9. The method of claim 1, said method further comprising redeeming
said life insurance policy by paying to said collateral agent the
redemption amount.
10. The method of claim 1, said method further comprising selling
said life insurance policy to said service provider in a private
sale for the private sale purchase price.
11. The method of claim 1, wherein said borrower agrees in said
service agreement that said service provider shall be entitled to
receive a base commission if said life insurance policy is sold
in a life settlement sale during said term of said service agreement.
12. The method of claim 11, said method further comprising receiving
a bid from a purchaser for the life settlement sale of said life
insurance policy at a purchase price; accepting said bid; and selling
said life insurance policy to said purchaser for said purchase price.
13. A method of facilitating the purchase of a life insurance policy
by a lender, the method comprising: lending to a borrower, said
borrower having acquired a life insurance policy on the life of
an insured wherein said acquisition comprises payment of a premium
for said life insurance policy, a loan of a principal amount, wherein
said principal amount is greater than or approximately equal to
the amount of said premium; receiving from said borrower an executed
non-recourse note for said principal amount in favor of said lender,
said non-recourse note comprising a maturity date and provisions
for accrual of interest on said principal amount at an interest
rate to said maturity date; facilitating a service agreement between
said borrower and a service provider, said service agreement comprising
a term, wherein said service provider agrees to purchase said life
insurance policy in a private sale during a private sale term for
a private sale purchase price, wherein said borrower agrees said
service provider shall be entitled to receive a base commission
if said life insurance policy is sold in a life settlement sale
during said term, and wherein said borrower agrees said service
provider shall be entitled to receive a servicing fee if said insured
dies during said term; and entering into a security agreement with
a collateral agent, said borrower and said service provider, wherein
said collateral agent agrees to hold said life insurance policy
and any proceeds of said life insurance policy as security for said
borrower's obligations to said lender under said non-recourse note
and for said borrower's obligations to said service provider under
said service agreement, and wherein said borrower, said lender,
service provider and said collateral agent agree said borrower shall
be entitled to redeem said life insurance policy during a redemption
period for a redemption price.
Insurance Description
RELATED APPLICATION INFORMATION
[0001] This application claims the benefit of U.S. Provisional
Patent Application Ser. No. 60/659,553, filed on Mar 8, 2005, the
disclosure of which is incorporated herein by reference in its entirety
for all purposes.
FIELD OF THE INVENTION
[0002] The present invention relates generally to facilitating
the purchase and possible retention of a life insurance policy and,
more particularly, to facilitating the purchase and possible retention
of a life insurance policy with loans in combination with the provision
of services related to the life insurance policy, including but
not limited to marketing and related services if the life insurance
policy is subsequently offered for sale.
BACKGROUND OF THE INVENTION
[0003] The ability to acquire a life insurance policy insuring
the life of an individual is dependent upon a number of factors,
one of the most significant of which is the individual's health.
The amount of life insurance that can be acquired on an individual's
life is also dependent upon a number of factors, including the individual's
net worth and/or earning capacity. A relatively healthy individual
with significant net worth and/or earning capacity may be eligible
to purchase significant life insurance coverage; however, at a particular
stage in such individual's life, his or her financial circumstances
and liquidity may not permit significant expenditures to acquire
life insurance. If the individual's health subsequently declines,
the cost of life insurance coverage may increase substantially or
life insurance coverage may become unavailable. Thus, there is a
need to facilitate the purchase of life insurance on the life of
an individual when the individual is relatively healthy, while minimizing
the current cash outlay required for such a purchase.
[0004] Because such a purchase of a life insurance policy may be
implemented to provide the policy owner the option of retaining
the policy, there is a need to provide a method for the purchase
of a life insurance policy that permits the policy owner to acquire
a life insurance policy on a non-recourse basis and in a manner
that minimizes the adverse tax consequences to the parties.
SUMMARY OF THE INVENTION
[0005] The present invention is for a method of facilitating the
purchase and possible retention of a life insurance policy on the
life of an individual, on a non-recourse basis, in a manner that
preferably minimizes the risk of adverse tax consequences to the
policy owner and provides appropriate financial incentives to the
lender and the service provider.
[0006] An embodiment of the method of the present invention may
preferably involve: (1) a lender, which may be a single entity or
individual, or a group of entities and/or individuals associated
with one another for purposes of the transaction, (2) a borrower,
which may be one or more individuals and/or a trust or other entity,
such as a partnership or limited liability company, created by one
or more individuals and/or entities, (3) one or more individuals
whose lives will be insured by one or more life insurance policies
(referred to herein as the insured), and who may also be the borrower;
(4) a service provider, which may be the lender or one or more other
individuals and/or entities and (5) a collateral agent, which may
be the borrower, the lender, the service provider, or one or more
other individuals and/or entities.
[0007] The borrower acquires one or more policies insuring the
life of the insured. Such policy or policies are referred to herein
as the life insurance policy. The lender agrees to lend to the borrower
funds for payment of some portion, or all, of the premiums due on
the life insurance policy. The borrower and the service provider
enter into a service agreement, pursuant to which the service provider
agrees to provide certain services with respect to the life insurance
policy, including but not limited to facilitating a possible sale
of the life insurance policy, for a period of time, in exchange
for compensation. Where permissible by applicable laws, the service
provider may offer additional features to the borrower, such as
an optional advance or guaranteed payment. The life insurance policy
and its proceeds are held by the collateral agent for the benefit
of the lender, the service provider and the borrower, as security
for the borrower's obligations to the lender and the service provider.
[0008] The borrower's obligations to the lender and the service
provider are preferably non-recourse, which means that if the borrower
fails to satisfy its obligations to either or both of such parties,
the recourse of such party or parties is limited to the rights granted
to the collateral agent in the life insurance policy and its proceeds,
as security.
[0009] Preferably, the borrower will have options for choosing
either continued ownership or termination of ownership of the life
insurance policy after some period of time has elapsed following
receipt of the loan from the lender. One such option may be to pay
the lender the amount owed the lender, thereby releasing the life
insurance policy from securing the borrower's obligations to the
lender; preferably, following the borrower's exercise of such option,
the borrower will continue to be obligated to the service provider,
and the life insurance policy will continue to secure those obligations,
for some period of time following satisfaction of the borrower's
obligations to the lender.
[0010] Alternatively, the borrower may elect to sell the life insurance
policy either to the service provider or a third party. The collateral
agent will receive and disburse any policy proceeds received as
a result of the insured's death.
[0011] Thus, the borrower is able to acquire life insurance on
the life of the insured on a non-recourse basis, with minimal impact
on liquidity if the borrower does not elect to continue to own the
life insurance policy. If the borrower elects to continue to own
the life insurance policy because, for example, the borrower has
determined that continued life insurance protection on the life
of the insured is desirable, the borrower remains obligated to the
service provider under the service agreement for a period of time.
Following expiration of the term of the service agreement, the borrower
will own the life insurance policy, free of any obligation to the
service provider or the lender.
[0012] Thus, the benefits of the method and system of the invention
may include, in addition to others not enumerated below, some or
all of the following: (1) initial acquisition of a life insurance
policy on a non-recourse basis with minimal impact on the borrower's
liquidity; (2) "locking-in" insurability of the insured;
(3) financial incentives for the lender and the service provider
sufficient to justify the risks of the transaction; (4) mitigation
of the risk of adverse Federal income tax consequences to the borrower
and the insured; and (5) if the borrower is a properly-drafted irrevocable
trust, exclusion of the borrower's share of any proceeds from the
sale or surrender of the policy during the insured's lifetime, or
of any proceeds payable upon the insured's death, from the estate
of the grantor of the trust that is the borrower for Federal estate
tax purposes.
BRIEF DESCRIPTION OF THE FIGURES
[0013] These and other features, aspects and advantages of the
method of the present invention will become more fully apparent
from the following detailed description, appended claims, and accompanying
drawings, wherein the drawings illustrate the method in accordance
with an exemplary embodiment of the present invention, and wherein:
[0014] FIG. 1 is a flow chart depicting the principal steps in
phase one of one embodiment of the method of the present invention;
[0015] FIG. 2 is a flow chart depicting the principal steps in
phase two of one embodiment of the method of the present invention;
[0016] FIG. 3 is a flow chart depicting the principal steps in
phase three of one embodiment of the method of the present invention;
and
[0017] FIG. 4 is an example of a term sheet used in one embodiment
of the method of the present invention.
DETAILED DESCRIPTION OF THE INVENTION
[0018] The method of the present invention for facilitating the
purchase and possible retention of a life insurance policy on a
secured, non-recourse basis preferably includes interaction among
five principal entities.
[0019] A lender will provide the funds to a borrower to enable
the borrower to pay one or more premiums on a life insurance policy
insuring the life of the insured. The borrower and a service provider
will enter into a service agreement pursuant to which the service
provider agrees to provide certain services to the borrower with
respect to the life insurance policy, including but not limited
to services related to a sale of the life insurance policy. A collateral
agent will hold assets and/or documents related to the life insurance
policy, for the benefit of the lender, the borrower, and the service
provider.
[0020] The Lender
[0021] The lender may be an individual, a single entity, or a group
of entities and/or individuals associated with one another for purposes
of an embodiment of the method of the present invention.
[0022] The Insured
[0023] The insured is an individual whose life is insured by the
life insurance policy that is the subject of an embodiment of the
method of the present invention. It will be understood by one with
ordinary skill in the art that a life insurance policy can insure
more than one life (for example, a joint or second-to-die policy),
and that any such life insurance policy could be used in an embodiment
of the method of the present invention. In such case, a reference
to the "insured" should be deemed to refer to the insureds,
or the survivor of the insureds, as the context may require.
[0024] It will be further understood by one with ordinary skill
in the art that multiple life insurance policies may be used in
an embodiment of the method of the present invention, and that if
multiple life insurance policies are the subject of such an embodiment,
all life insurance policies may insure the life of the same insured,
or some life insurance policies may insure the life of one insured,
and other life insurance policies may insure the life of another
insured. For example, a single transaction using the method of the
present invention may govern policies on the lives of each of a
husband and wife.
[0025] If more than one life insurance policy is the subject of
a single transaction using the method of the present invention,
a reference to the life insurance policy shall refer to all, some,
or one of such life insurance policies, as the context may require.
If the life of more than one individual is insured by such life
insurance policies, a reference to the insured shall refer to the
individual or individuals whose life or lives are insured by such
life insurance policies, as the context may require. Furthermore,
in such case, options, rights and obligations of the lender, service
provider, borrower and/or collateral agent with respect to the life
insurance policy may refer to any one or more of such life insurance
policies and such options, rights and/or obligations may be exercised
in the same manner or a different manner for such policies.
[0026] The Borrower
[0027] The borrower may be one or more individuals and/or a trust
or other entity, such as a partnership or limited liability company,
created by one or more individuals and/or entities. In a preferred
embodiment of the method of the present invention, the insured,
or another individual or entity, acting alone or with yet another
individual or entity, creates a trust or other entity, such as a
partnership or limited liability company, which trust or other entity
will be the borrower in an embodiment of the method of the present
invention. In such preferred embodiment, the trust or other entity
that is the borrower is preferably structured to prevent inclusion,
for Federal estate tax purposes, of assets owned by the borrower
in the estate of any individual who created the borrower. In addition,
in the preferred embodiment in which the borrower is a trust, the
trust that is the borrower is preferably structured as a "non-grantor
trust"; specifically, a trust of which no individual or entity
that creates the trust is treated as owner of the trust assets for
Federal income tax purposes. Methods of structuring such trusts
are known to those with ordinary skill in the art. The borrower
may be the insured. If the borrower is not the insured, the borrower
will have an insurable interest in the life of the insured under
applicable state law.
[0028] The Service Provider
[0029] The service provider may be the lender. Alternatively, the
service provider may be an individual, a single entity, or a group
of entities and/or individuals associated with one another for purposes
of an embodiment of the method of the present invention.
[0030] The Collateral Agent
[0031] The collateral agent will hold certain assets and/or documents
associated with an embodiment of the method of the present invention
for a period of time, as discussed below in more detail. The collateral
agent can be an individual, a single entity, or a group of entities
and/or individuals associated with one another for purposes of such
embodiment. Preferably, the collateral agent is not the borrower,
the lender or the service provider. However, any one of the lender,
the service provider, or the borrower could be the collateral agent
in an embodiment of a method of the present invention.
[0032] For clarity, and as illustrated in FIGS. 1-3, it is helpful
to describe the method of the present invention in three phases.
However, it will be understood by one with ordinary skill in the
art that separation of the method of the present invention into
these phases is for purposes of description only; no formal division
into phases is required to practice the method of the present invention.
[0033] The portion of the method of the present invention described
as the first phase FIG. 1 begins generally when the parties enter
into one or more agreements to establish their respective rights
and obligations with respect to the life insurance policy. This
phase continues until on or about the maturity date (as described
below) or, if sooner, the death of the insured. The second phase
FIG. 2 refers to the period of time near the maturity date. The
third phase FIG. 3 refers to the period of time following the maturity
date to the expiration of the term of the service agreement (as
described below).
[0034] Phase One
[0035] Acquisition of the Life Insurance Policy. The borrower acquires
the life insurance policy. The borrower may acquire the life insurance
policy directly from an insurance company. Alternatively, the borrower
may acquire the life insurance policy from a previous owner of the
life insurance policy by gift, by sale, or by any other method known
in the art. The borrower may acquire the life insurance policy directly,
such that the borrower is the owner of the policy. Alternatively,
the borrower may acquire the policy indirectly, for example, by
acquiring an entity or interest in an entity, such as a partnership
or limited liability company, that is the owner of the life insurance
policy.
[0036] Loan from the Lender to the Borrower. The lender loans funds
to the borrower, preferably in an amount anticipated to be sufficient
to pay premiums on the life insurance policy for a designated period
of time, such as to and including the maturity date 2, 3. Such funds
may be paid (1) directly by the lender to the insurance company
that issued the life insurance policy, (2) to the borrower, subject
to an obligation to pay such funds to the insurance company that
issued the life insurance policy, and/or (3) to the collateral agent,
subject to an obligation to pay such funds to the insurance company
that issued the life insurance policy. The loan of the funds for
payment of such premiums may be made in one lump sum or periodically,
for example, near the due date or dates of premiums for the life
insurance policy. In a preferred embodiment of the method of the
present invention, the lender will be obligated to make additional
loans to the borrower prior to the maturity date if additional premium
payments are required (or, in some cases, desirable) with respect
to the life insurance policy prior to the maturity date.
[0037] Preferably, the borrower has no cash outlay requirements
during phase one of the method of the present invention. Therefore,
the lender may also loan to the borrower (or may pay directly on
behalf of the borrower) other costs and/or fees associated with
entering into the loan and/or ongoing costs anticipated with respect
to the loan. Such fees and expenses may optionally include (1) fees
and expenses incident to the preparation and/or administration of
the trust or other entity that is the borrower (if the borrower
is not an individual), (2) fees and expenses of the lender relating
to its origination of the loan, and/or (3) fees paid or payable
to the collateral agent for its services under the security agreement
2. Any such loans may be made in one lump sum or periodically, for
example, as payment of such fees and/or expenses come due. In a
preferred embodiment of the method of the present invention, the
lender will be obligated to make additional loans to the borrower
prior to the maturity date if any such fees and/or expenses are
due to be paid.
[0038] The borrower and the lender will enter into one or more
agreements to document their respective rights and obligations with
respect to the loans from the lender to the borrower 4, 6. Such
agreements, in general, are known in the art and include, but are
not limited to notes and/or financing agreements. To practice the
method of the present invention, one or more of these agreements
(collectively, the "lender financing agreements" and,
individually, a "lender financing agreement") will preferably
contain the following provisions:
[0039] (1) Establishment of the Principal Amount. The amount loaned
and/or to be loaned by the lender to the borrower will be set forth
or otherwise described in a manner that permits its calculation
by one with ordinary skill in the art; such amount is referred to
as the "principal amount of the note", although the principal
amount of the note may be found in a lender financing agreement
other than an agreement typically referred to in the art as a note.
[0040] (2) Designation of a Maturity Date. A maturity date, which
is the date upon which payment of amounts due to the lender under
the lender financing agreements is due, will be set forth or otherwise
described in a manner that permits its calculation by one with ordinary
skill in the art. The maturity date is preferably more than approximately
one year but less than approximately five years after the date the
borrower and lender enter into one or more of the lender financing
agreements; more preferably, the maturity date of the note is between
approximately two and approximately three years after the date the
borrower and lender enter into one or more of the lender financing
agreements. In general, because, as discussed below, the method
of the present invention preferably includes an optional sale by
the borrower of the life insurance policy, the maturity date preferably
will be near or after the date following which the insurance company
that issued the life insurance policy can no longer contest payment
of the proceeds of the life insurance policy upon the death of the
insured and can no longer cancel the life insurance policy, as provided
by the contract of insurance and/or applicable law.
[0041] A maturity date is preferably included in the method of
the present invention to establish a period of time during which
the borrower can make a decision and exercise certain options (described
below) regarding the on-going ownership of the life insurance policy.
It will be understood by one with ordinary skill in the art that
means other than establishing a due date for the borrower's payment
to the lender of the amounts due to the lender under the could be
used to establish such period of time. For example, the borrower's
obligations to the lender under the lender financing agreements
could be payable on demand of the lender, either at any time, or
at any time following one or more designated events and/or following
the expiration of a designated period of time; in that case, the
maturity date could refer to demand by the lender, occurrence of
one or more of the designated events triggering the lender's right
to demand payment, and/or expiration of the period of time following
which the lender is entitled to demand payment. In general, if the
lender financing agreements do not contain a maturity date, as such
term is understood by those with ordinary skill in the art, references
herein to the maturity date shall refer to the date, dates, and/or
period of time during which the borrower can exercise one or more
of the options available to the borrower in what is described as
phase two of the method of the present invention.
[0042] As will be understood by one with ordinary skill in the
art, on or prior to the maturity date, the borrower and the lender
may agree to extend the maturity date, in which case references
to the maturity date shall thereafter refer to the maturity date,
as extended.
[0043] (3) Provisions for Interest on the Principal Amount. Preferably,
interest will be due on the amounts loaned by the lender to the
borrower (i.e., on the principal amount of the note). Preferably,
any such interest will accrue until the maturity date and will compound
at least annually. For example, interest may compound quarterly.
Compounding and accruing interest allows the borrower to continue
to remain substantially free of obligations of cash outlays at least
until the maturity date. In addition, when the borrower is a trust
or similar entity, compounding and accruing interest may eliminate
the need for gifts, sales or other transfers to the borrower to
provide funds that would otherwise be required if interest were
to be paid. However, the method of the present invention could be
practiced if interest were paid periodically by the borrower.
[0044] The borrower and lender may agree on any interest rate;
preferably, the interest rate will be approximately equal to the
applicable Federal short term rate in effect on the effective date
of the note, if the term of the note is three years or less or the
note is a demand note, or the applicable Federal mid term rate,
if the term of the note is more than three years. An object of the
invention is to mitigate the risks of the Internal Revenue Service
successfully taking the position that some portion or all of the
accrued interest due on the amounts owed by the borrower to the
lender is income to the borrower in the event the borrower does
not directly repay the amounts due to the lender under the lender
financing agreements on the maturity date. Minimizing the interest
charged on the principal balance of the note helps to achieve this
object.
[0045] (4) Establish the Non-Recourse Nature of the Lender Financing
Agreements. As described in further detail below, the borrower's
obligations to the lender under the lender financing agreements
are preferably secured by the life insurance policy, using a collateral
assignment document, a security agreement, and/or any other documentation
or method known in the art to establish that the life insurance
policy secures the borrower's obligations to the lender under the
lender financing agreements. Furthermore, the borrower's obligations
to the lender under the lender financing agreements are preferably
non-recourse; specifically, in the event of the borrower's default
under the lender financing agreements, such as the borrower's failure
to pay the amounts owed to the lender on the maturity date, the
lender's recourse will be limited to the exercise of its rights
in the life insurance policy and its proceeds. If the borrower's
obligations to the lender under the lender financing agreements
are non-recourse, then if the borrower elects not to retain the
life insurance policy, the borrower will not be obligated to make
any payment to the lender from its assets, other than the life insurance
policy; accordingly, the non-recourse nature of the borrower's obligations
to the lender helps achieve an object of the invention.
[0046] The lender financing agreements may contain terms in addition
to those described above, including but not limited to terms related
to prepayment of amounts due to the lender by the borrower, governing
law, a description of events of default and remedies of the lender
upon an event of default. In a preferred embodiment of the invention,
events of default include the borrower's failure to pay premiums
due on the life insurance policy and/or the borrower's failure to
pay the amounts due under the lender financing agreements.
[0047] Service Agreement. As discussed above, an object of the
method of the present invention is to provide a means of facilitating
the acquisition of a life insurance policy in a manner that (1)
permits the borrower to acquire the life insurance policy with borrowed
funds, on a non-recourse basis, with minimal impact on liquidity,
(2) provides the borrower the option of electing not to retain the
policy and, upon such election, having no obligations for payment
to the lender under the lender financing agreements, and (3) provides
appropriate financial incentives to the lender.
[0048] A life insurance policy, particularly a life insurance policy
with a relatively large face amount of insurance, can require significant
time and attention for its proper maintenance and management. For
example, in certain life insurance policies, typically called variable
or specific account policies, the cash value of the life insurance
policy is invested in funds or other investments selected by the
owner of the life insurance policy; thus, such a life insurance
policy must be managed in a manner similar to other investments.
Life insurance policies should typically be evaluated periodically
for performance (even if the life insurance policy is not a variable
policy), premium due dates must be monitored, and the like.
[0049] As discussed above, the borrower's obligations to the lender
under the lender financing agreements are preferably non-recourse;
therefore, it is important to the lender that the life insurance
policy that secures the borrower's obligations to the lender under
the lender financing agreements (and that may provide the lender
its only source of repayment) is carefully maintained and monitored.
[0050] If the borrower determines continued ownership is not appropriate,
the borrower and/or the lender may wish to convert the life insurance
policy to cash. One means of converting the life insurance policy
to cash would be to sell it. Such sales are often referred to by
those with ordinary skill in the art, and are referred to herein,
as life settlement sales. A life settlement sale of a life insurance
policy is distinguished from the surrender of a life insurance policy;
a surrender of a life insurance policy involves its return to the
insurance company that issued the life insurance policy in exchange
for payment by the insurance company of an amount described in the
contract of life insurance, which amount is often equal or related
to the cash surrender value of the life insurance policy. While
a life settlement sale of a life insurance policy may produce a
greater return for the life insurance policy than a surrender of
that life insurance policy would produce, it is more complicated
than a surrender of the life insurance policy; therefore, an agent
or broker knowledgeable in the art of such sales is typically engaged
to assist with such a sale. Accordingly, the borrower or the lender
may have a need for the services of such an agent or broker.
[0051] For purposes of information, a life settlement sale is also
distinguished by those with ordinary skill in the art from a viatical
sale (or viatical settlement)--a viatical sale typically refers
to the sale of a life insurance policy to a third party when the
insured is reasonably expected to have a significantly shorter than
normal life expectancy, for example, a life expectancy of less than
two years. As discussed in detail below, the method of the present
invention includes an optional life settlement sale. Depending upon
the health of the insured at the time of an optional life settlement
sale, such sale may be a viatical sale, as such term is used by
those with ordinary skill in the art.
[0052] The method of the present invention innovatively takes advantage
of the needs of the borrower and the lender for services related
to the life insurance policy to minimize the risk to the lender,
by allocating much of the risk to the service provider. Therefore,
a return to the lender based on interest at or near the applicable
Federal rate may be acceptable to the lender. The service provider
agrees to provide the services that will or may be required with
respect to the life insurance policy for a period of time, bears
more of the risk associated with the borrower's election regarding
retention of the life insurance policy and may (or may not) receive
compensation for its services related to the life insurance policy
commensurate with the value of those services to the parties and
the risk it assumes.
[0053] As noted above, in an embodiment of the method of the present
invention, the lender can be the service provider. Although the
risks discussed above are not shifted from the lender to the service
provider in such an embodiment, the method of the present invention
does permit an allocation of the compensation to the lender in its
respective capacities as lender and service provider in a manner
commensurate with its risks and obligations in such respective capacities.
[0054] To practice the method of the present invention, the borrower
and the service provider will enter into one or more agreements
to document their respective rights and obligations with respect
to the services to be provided by the service provider to the borrower
6, 10. One or more of these agreements (collectively, the "service
agreement") will preferably contain provisions relating to
the following:
[0055] (1) Services Provided by Service Provider. The service provider
will provide services to the borrower with respect to the life insurance
policy, which services may include one or more of the following
(a) the administration, servicing and maintenance of the life insurance
policy, (b) the performance of refinancing advisory services (e.g.,
advice regarding insurance financing and refinancing markets), (c)
the closing of any optional feature as elected by the borrower,
and (d) the performance of any other services other than marketing,
soliciting bids for, brokering and selling the life insurance policy.
[0056] In addition, the service provider will be designated by
the borrower as its broker for any sale of the life insurance policy.
Certain preferred provisions relating to the service provider's
services as broker for the sale of the life insurance policy are
described in more detail below. The service provider may also advise
and/or agree to advise the borrower about available premium financing
and refinancing, the life settlement market, and related matters.
[0057] (2) Compensation to Service Provider. The service agreement
will establish compensation for the service provider. In a preferred
embodiment of the method of the present invention, the service provider
will be entitled to receive compensation if: (a) the life insurance
policy is sold while the service agreement is in force, (b) the
insured dies while the service agreement is in force, or (c) as
more fully discussed below, the collateral agent exercises rights
in the life insurance policy and receives proceeds from the exercise
of those rights.
[0058] Compensation provided to the service provider under the
service agreement can be based upon the services provided by the
service provider and can be established in any manner that fairly
and adequately compensates the service provider for the services
it will and/or may provide under the service agreement, taking into
consideration the risk to the service provider under the service
agreement. In a preferred embodiment of the method of the present
invention, the service provider's compensation will include servicing
fees, a base commission, and an incentive commission, as more particularly
described below:
[0059] (i) Servicing Fees. Servicing fees will be owed to the service
provider in the event the insured dies during the term of the service
agreement, and compensate the service provider for its on-going
services related to monitoring the life insurance policy, maintaining
the life insurance policy, advising the borrower with respect to
options for retention or sale of the life insurance policy, and
the like. In a preferred embodiment of the invention, the servicing
fees are based upon a percentage of the face amount of the life
insurance policy and accrue monthly. In such preferred embodiment
of the invention, the aggregate servicing fees will not exceed the
base commission (described below) that would have been owed to the
service provider if the life insurance policy had been sold prior
to the insured's death.
[0060] (ii) Base Commission. The service provider will be entitled
to receive a base commission if the life insurance policy is sold
in a life settlement sale during the term of the service agreement.
In a preferred embodiment of the method of the present invention,
the base commission is based upon a percentage of the face amount
of the life insurance policy.
[0061] (iii) Incentive Commission. The service provider may be
entitled to receive an incentive commission, if the life insurance
policy is sold in a life settlement sale during the term of the
service agreement and if the proceeds received in connection with
such sale exceed an amount set forth in the service agreement or
otherwise described in a manner that permits its calculation by
one with ordinary skill in the art. For example, the incentive commission
can be a percentage of the portion of the sale proceeds that exceeds
the sum of (A) the amounts then due and payable by the borrower
to the lender under the lender financing agreements, (B) the base
commission due the service provider as a result of the life settlement
sale of the life insurance policy, (C) other obligations secured
by the life insurance policy, and (D) if the life insurance policy
had been the subject of a redemption under the security agreement
(as described below), the amounts previously paid by the borrower
with respect to such redemption.
[0062] (3) Optional Payments by Service Provider to Borrower. Optionally,
in a preferred embodiment of the method of the present invention,
the borrower may be entitled, where permissible under applicable
laws, to receive payments from the service provider that it will
be entitled to keep or receive in the event the borrower elects
not to retain the life insurance policy.
[0063] (i) Optional Advance. One such optional payment that may
be used in such a preferred embodiment of the method of the present
invention, and where permissible under applicable laws, is a payment
of an optional advance from the service provider to the borrower
at or near the date upon which the borrower and the service provider
enter into the service agreement 9. For example, the borrower may
elect to receive the optional advance upon entering into the service
agreement, which optional advance will be payable to the borrower
by the service provider after expiration of the period of time during
which the borrower (or other owner of the life insurance policy)
has the right to examine the life insurance policy and cancel the
coverage for a refund of the premiums paid with respect to the life
insurance policy. In such preferred embodiment of the present invention,
if the borrower elects to receive the optional advance, then the
base commission and/or the incentive commission to which the service
provider is entitled in the event of a life settlement sale of the
life insurance policy is preferably greater than the base commission
and/or the incentive commission that would have been owed to the
service provider if the borrower had not elected to receive the
optional advance.
[0064] If the borrower receives the optional advance, the borrower
and the service provider will preferably enter into one or more
agreements to document the borrower's obligation to repay such advance
to the service provider, for example, a note 8. Such agreement or
agreements (hereinafter referred to as the "advance note")
will preferably contain the following provisions:
[0065] (A) Establishment of the Principal Amount. The amount of
the optional advance from the service provider to the borrower will
be set forth or otherwise described in a manner that permits its
calculation by one with ordinary skill in the art; such amount is
referred to as the "principal amount of the advance note".
[0066] (B) Provisions for Interest on the Principal Amount. Preferably,
interest will be due on the principal amount of the advance note.
Preferably, any such interest will accrue until the maturity date
and will compound at least annually. For example, interest may compound
quarterly.
[0067] (C) Establish the Non-Recourse Nature of the Advance Note.
As described in further detail below, the borrower's obligations
to the service provider, including its obligations under any optional
advance note, are preferably secured by the life insurance policy.
Furthermore, the borrower's obligations to the service provider,
including its obligations under any optional advance note, are preferably
non-recourse; specifically, in the event of the borrower's default
under the service agreement and/or any optional advance note, the
service provider's recourse will be limited to the exercise of its
rights in the life insurance policy and its proceeds.
[0068] An optional advance note may contain terms in addition to
those described above, including but not limited to terms related
to prepayment of amounts due to the lender by the borrower, governing
law, a description of events of default and remedies of the lender
upon an event of default.
[0069] Guaranteed Payment Option. An alternative option that may
be offered to the borrower in an embodiment of the method of the
present invention is a guaranteed payment option; a guaranteed payment
refers to a payment the service provider promises to make to the
borrower in the event the borrower elects to sell the life insurance
policy during the term of the service agreement (as described below).
[0070] For example, the borrower may elect the guaranteed payment
option at or near the date upon which the borrower and the service
provider enter into the service agreement. Consent of the service
provider may be required for the borrower's election of the guaranteed
payment option. If the borrower elects the guaranteed payment option,
then the base commission and/or the incentive commission to which
the service provider is entitled in the event of a life settlement
sale of the life insurance policy is preferably greater than the
base commission and/or the incentive commission that would have
been owed to the service provider if the borrower had not elected
the guaranteed payment option.
[0071] If the borrower elects the guaranteed payment option, the
borrower, the service provider and a third party will preferably
enter into one or more agreements pursuant to which such third party
acts as escrow agent to hold an amount approximately equal to the
amount of guaranteed payment. Such agreement or agreements will
preferably contain provisions relating to the third party's duties
and obligations as escrow agent to hold and manage the funds transferred
to it for the benefit of the service provider and the borrower,
and provide instructions to such third party for payment of such
funds to the service provider and/or the borrower.
[0072] (4) Establishment of the Term of the Service Agreement.
The service agreement will have a term; following the expiration
of such term, the borrower will no longer be obligated to retain
the services of the service provider with respect to the life insurance
policy, and the service provider will no longer be obligated to
provide such services. In a preferred embodiment of the method of
the present invention, the term of the service provider will continue
until the first to occur of (a) the date upon which the service
provider receives the amount to which it is entitled under the service
agreement in connection with the death of the insured, (b) the date
upon which the service provider receives the amount to which it
is entitled under the service agreement in connection with the sale,
transfer, or surrender of the life insurance policy, and (c) an
expiration date. Preferably, the expiration date is after the maturity
date of the borrower's obligations to the lender under the lender
financing agreements. More preferably, the expiration date is between
approximately one year and approximately five years after such maturity
date. For example, the expiration date may be three years after
the maturity date of the borrower's obligations to the lender under
the lender financing agreements.
[0073] In a preferred embodiment of the method of the present invention,
the term of the service agreement may be extended if (1) the borrower
is in default of its obligations to the service provider upon the
expiration of the term, or (2) a life settlement sale is pending.
In such case, the term will continue until the borrower is no longer
in default or until such sale occurs, as the case may be.
[0074] (4) Establish the Non-Recourse Nature of the Borrower's
Obligations Under the Service Agreement. As described in further
detail below, the borrower's obligations to the service provider
under the service agreement are preferably secured by the life insurance
policy, using a collateral assignment document, a security agreement,
and/or any other documentation or method known in the art to establish
that the life insurance policy secures the borrower's obligations
to the service provider under the service agreement. Furthermore,
the borrower's obligations to the service provider under the service
agreement are preferably non-recourse; specifically, the service
provider will be entitled to receive its compensation solely from
the life insurance policy or its proceeds. In addition, as described
in more detail below, if the term of the service agreement ends
prior to the death of the insured and prior to a sale of the life
insurance policy, then assuming no default by the borrower, the
borrower will have no further obligation to the service provider
under the service agreement, including no obligation to pay to the
service provider the servicing fees or base commission and/or incentive
commission to which the service provider would have been entitled
if the insured had died or if the life insurance policy had been
sold prior to expiration of the term of the service agreement.
[0075] Life Insurance Policy Secures Borrower's Obligations. In
the method of the present invention, the borrower's obligations
to the lender under the lender financing agreements and the borrower's
obligations to the service provider under the service agreement
(including any obligations of the borrower to the service provider
under any optional advance note) are secured by the life insurance
policy and its proceeds.
[0076] Preferably, a collateral agent will act as an agent to the
lender, the service provider, and the borrower to hold the life
insurance policy and its proceeds, including any proceeds received
as a result of its sale or as a result of the insured's death, for
the benefit of the lender, the service provider and/or the borrower
12. The borrower, the lender and/or the service provider will enter
into one or more agreements known in the art (for example, a collateral
assignment) to create a security interest in the life insurance
policy and its proceeds for the benefit of the lender, the service
provider and/or the collateral agent, on behalf of the lender and/or
the service provider; any such agreements are referred to herein
collectively as the "collateral assignment". In addition,
the lender, the service provider, the borrower and the collateral
agent will enter into one or more agreements to document their respective
rights and obligations with respect to the life insurance policy
and its proceeds 14. Examples of such agreements include, but are
not limited to security agreements and/or collateral agreements
and are referred to herein as the "security agreement".
[0077] Using any appropriate manner known to one with ordinary
skill in the art, the security agreement and/or the collateral assignment
will preferably contain provisions to: (1) create a security interest
in the life insurance policy and its proceeds, which security interest
is preferably capable of being perfected in accordance with the
applicable state's Uniform Commercial Code; (2) enable the collateral
agent to protect and maintain the life insurance policy and its
proceeds; and (3) direct the collateral agent regarding the distribution
of any proceeds of the life insurance policy received by it.
[0078] The security agreement will preferably remain in effect
so long as the borrower remains obligated to the lender under the
lender financing agreements or to the service provider under the
service agreement.
[0079] In a preferred embodiment of the method of the present invention,
one or more of the lender, the service provider, the borrower and/or
the insured will deliver certain documents to the collateral agent,
to be held for the benefit of the lender, the service provider,
and the borrower in accordance with the terms of the security agreement.
These documents may assist the collateral agent in carrying out
its duties with respect to the life insurance policy and its proceeds
and may aid the lender and/or the service provider in complying
with rules and regulations (whether imposed by a governing body,
such as a state, or imposed by the insurance company that issued
the life insurance policy, as a condition to the issuance and/or
continued maintenance of the life insurance policy) that may be
applicable to one or more aspects of an embodiment of the method
of the present invention. Such documents may optionally include
one or more of the following: (1) the original copy of the life
insurance policy; (2) a collateral assignment of the life insurance
policy, preferably executed by the borrower in favor of the collateral
agent; (3) a change of owner form of the life insurance policy,
executed by the borrower (or other owner of the life insurance policy);
(4) an authorization to release protected health information, executed
by the insured, pursuant to which the insured authorizes medical
professionals to release medical information regarding the insured
to the service provider or its designee for the purpose of evaluating
or underwriting the insured's health or life expectancy in connection
with the sale of the life insurance policy and to verify such health
in connection with the life insurance policy; (5) representations
and agreement of the insured (the "insured's representations")
in which the insured (a) acknowledges he or she is the insured under
the life insurance policy, (b) acknowledges that the life insurance
policy, the lender financing agreements, and the service agreement
(including any optional advance note) inure to the insured's benefit,
and are being used by the insured for personal planning purposes,
(c) represents that he or she does not believe the borrower has
a present intent to sell the life insurance policy, and (d) if the
borrower is a trust created by the insured, agrees, in order to
induce the lender to provide the benefits of the lender financing
agreements, (i) that the insured has established the trust that
is the borrower for the purpose of obtaining insurance on the insured's
life, (ii) that the trust that is the borrower has entered into
the lender financing agreements and the service agreement to finance
the premiums on the life insurance policy at least until the maturity
date, and (iii) that the life insurance policy is collaterally assigned
to the collateral agent for the benefit of the lender and the service
provider, and that the collateral agent, the lender, and/or the
service provider may become the sole owner and beneficiary (or co-owners
and co-beneficiaries) of the life insurance policy in the event
the borrower defaults under its obligations to the lender under
the lender financing agreements and/or to the service provider under
the service agreement (including any optional advance note); (6)
the insured's designated contacts, with which the insured names
certain persons whom the service provider is authorized to contact
regarding the insured; (7) an insurability disclosure, with which
the insured acknowledges that (a) he or she is the insured under
the life insurance policy, (b) that the life insurance policy may
be sold at the election of the borrower, (c) if the borrower is
a trust, that at the time the life insurance policy was issued,
the primary beneficiaries of the trust that is the borrower had
an interest in the insured's life, which may include a relationship
by blood or marriage, or a substantial economic interest in the
insured's continued life, (d) that the lender and the service provider
had an interest in the insured's life when the life insurance policy
was issued arising from the extension of non-recourse credit for
the purchase of the life insurance policy and funds either or both
of them will receive if the borrower sells the life insurance policy
in a life settlement sale pursuant to the service agreement, (e)
that in the event the service provider or another party purchases
the life insurance policy, it will acquire ownership and will become
the sole beneficiary of any and all benefits and proceeds paid under
the life insurance policy upon the insured's death, and (f) that
there is a limit on the amount of insurance coverage the insured
can obtain on his or her life and the life insurance policy will
continue to count toward that limit, as long as the life insurance
policy remains in force.
[0080] Death of the Insured Prior to Maturity Date. In the event
of the death of the insured prior to the maturity date 16, the proceeds
of the life insurance policy payable as a result of the death of
the insured preferably will be paid to the collateral agent. The
collateral agent will receive the proceeds for the benefit of the
lender, the service provider and the borrower. Generally, under
the method of the present invention, the proceeds of the life insurance
policy will be distributed to the collateral agent, the lender,
the service provider, and/or the borrower in accordance with the
priorities set forth in the security agreement. For example, in
a preferred embodiment of the method of the present invention, payment
of the proceeds of the life insurance policy in the event of the
death of the insured prior to the maturity date will be made as
follows: (1) first, to the payment of any unpaid fees due the collateral
agent and then to all costs and expenses of and relating to the
exercise of any rights and remedies under the security agreement;
(2) second, to the payment of the amount then due the lender under
the lender financing agreements, i.e., the outstanding principal
balance of the note and unpaid accrued interest thereon; (3) third,
to the payment of any optional advance note; (4) fourth, to the
payment of any unpaid amounts due to the service provider under
the service agreement, including the servicing fee; (5) fifth, to
the payment of any and all other accrued obligations of the borrower
to the lender or the service provider that are secured by the life
insurance policy; and (6) sixth, the remainder, if any, to the borrower
(or the person, persons, entity and/or entities otherwise entitled
to receive the borrower's share of such proceeds) 22.
[0081] Policy Contest Prior to Maturity Date. In the event the
insurance company that issued the life insurance policy denies a
claim for benefits under the life insurance policy or asserts a
right to cancel the life insurance policy pursuant to a suicide
or contestability provision of the life insurance policy, and, therefore,
returns the premiums paid on the life insurance policy, such returned
premiums preferably will be paid to the collateral agent. The collateral
agent will receive the proceeds for the benefit of the lender and
the service provider. Generally, under the method of the present
invention, such returned premiums will be distributed to the collateral
agent, the lender, the service provider, and/or the borrower in
accordance with the priorities set forth in the security agreement.
For example, in a preferred embodiment of the method of the present
invention, payment of such returned premiums will be made as follows:
(1) first, to the payment of any unpaid fees due the collateral
agent and then to all costs and expenses of and relating to the
exercise of any rights and remedies under the security agreement;
(2) second, to the payment of the amount then due the lender under
the lender financing agreements, i.e., the outstanding principal
balance of the note and unpaid accrued interest thereon; and (3)
third, to the payment of any optional advance note.
[0082] Phase Two
[0083] Phase two describes the period of time near the maturity
date of the borrower's obligations to the lender under the lender
financing agreements. More generally, it describes the time or times
during which the borrower can exercise one or more options with
respect to continued ownership of the life insurance policy. For
example, in an embodiment of the method of the present invention
in which the borrower's obligations to the lender under the lender
financing agreements are payable on demand of the lender, either
at any time, or at any time following one or more designated events
and/or following the expiration of a designated period of time,
phase two may describe the period of time near demand by the lender,
on or about the occurrence of one or more of the designated events
triggering the lender's right to demand payment, and/or near expiration
of the period of time following which the lender is entitled to
demand payment.
[0084] In a preferred embodiment of the method of the present invention
for a period of time near the maturity date (for example, for the
period of time beginning six months prior to the maturity date and
ending on or about the maturity date), the borrower 26 may select
among one or more of the following options with respect to the life
insurance policy: (1) redeem the life insurance policy, so that
it no longer secures the obligations of the borrower to the lender
under the lender financing agreements 32, (2) sell the life insurance
policy to the service provider for an amount equal to some portion
or all of the borrower's liabilities to the collateral agent, to
the service provider under any optional advance note, and to the
lender under the lender financing agreements 34, or (3) seek to
sell the life insurance policy to a third party in a life settlement
sale 36. Of course, a borrower may choose to do nothing upon the
maturity date 30, which may result in the borrower's default of
its obligations to the lender, in which case, as a result of the
borrower's default, the collateral agent, acting on behalf of the
lender, the service provider, and the borrower, may exercise its
rights in the life insurance policy and its proceeds under the security
agreement.
[0085] Optional Redemption. If the borrower wishes to continue
to own the life insurance policy beyond the maturity date, the borrower
preferably will have the right to elect to redeem the life insurance
policy, so that it no longer secures the obligations of the borrower
to the lender under the lender financing agreements. In general,
in a preferred embodiment of the method of the present invention,
such redemption is structured in a manner that requires repayment
to the lender and the service provider of a redemption price approximately
equal to any expenditures made by the lender and/or the service
provider to or on behalf of the borrower that are secured by the
life insurance policy. In addition, a period of time during which
the borrower can exercise its right to redeem the life insurance
policy--a redemption period--is established. For example, in a preferred
embodiment of the method of the present invention in which the amount
loaned to the borrower by the lender includes fees and expenses
of the lender relating to its origination of the loan, the borrower
may be permitted to redeem the life insurance policy during a redemption
period on or near the maturity date by paying to the collateral
agent a redemption price of an amount equal to the lesser of (1)
the greater of (a) the sum of (i) the amounts loaned by the lender
to the borrower for premium payments on the life insurance policy
included in the principal balance of the note, (ii) amounts loaned
by the lender to the borrower for fees and expenses incident to
the preparation and/or administration of the trust or entity that
is the borrower (if the borrower is not an individual), (iii) fees
paid or payable to the collateral agent for its services under the
security agreement, (iv) the amount then due under any optional
advance note, and (v) interest on the amounts described in (i),
(ii), (iii), and (iv), in the amount and as compounded as provided
in the lender financing agreements or the advance note, as applicable,
or (b) if ascertainable, the fair market value of the life insurance
policy, or (2) the aggregate amounts then due to the lender under
the lender financing agreements (i.e., the then outstanding principal
balance of the note of and any accrued interest thereon) and to
the service provider under any optional advance note.
[0086] The collateral agent will receive the borrower's payment
for redemption of the life insurance policy for the benefit of the
lender and the service provider 38. Generally, under the method
of the present invention, the proceeds of the borrower's optional
redemption of the life insurance policy will be distributed to the
collateral agent, the lender, and/or the service provider in accordance
with the priorities set forth in the security agreement. For example,
in a preferred embodiment of the method of the present invention,
payment of the proceeds of the life insurance policy in the event
of the redemption of the life insurance policy will be made as follows:
(1) first, to the payment of any unpaid fees due the collateral
agent and then to all costs and expenses of and relating to the
exercise of any rights and remedies under the security agreement;
(2) second, to the payment of any optional advance note, and (3)
third, to the payment of the amount then due the lender under the
lender financing agreements, i.e., the outstanding principal balance
of the note and unpaid accrued interest thereon 42. Thereafter,
the life insurance policy and its proceeds will no longer be held
as security for any obligations of the borrower to the lender under
the lender financing agreements. However, the life insurance policy
and its proceeds will continue to be held by the collateral agent
for the benefit of the service provider, to secure the borrower's
obligations to the service provider until expiration of the term
of the service agreement.
[0087] Optional Sale. Preferably, under the method of the present
invention, the borrower will have the right to sell and/or seek
to sell the life insurance policy on or near the maturity date.
In a preferred embodiment of the present invention, the borrower
will have at least two options regarding the sale of the life insurance
policy--(1) a right to sell the life insurance policy to the service
provider in a private sale during a private sale period for a designated
private sale purchase price 34, and (2) a right to solicit bids
for the purchase of the life insurance policy in a life settlement
sale 36.
[0088] Private Sale Option. The borrower's right to sell the life
insurance policy to the service provider in a private sale, and
the terms and conditions of such sale, can be established in any
manner that sets a private sale purchase price approximately equal
to the then fair market value of the life insurance policy (or a
reasonable approximation thereof), but in no event more than the
amount then due by the borrower to the lender under the lender financing
agreements. In a preferred embodiment of the method of the present
invention, the private sale purchase price for the life insurance
policy in the event of a private sale is approximately equal to
the sum of (1) amounts loaned to the borrower by the lender for
premium payments on the life insurance policy, plus interest on
such amounts as provided in the lender financing agreements, and
(2) the amount due under any optional advance note to the service
provider or the amount of any guaranteed payment, if a guaranteed
payment option was offered to and selected by the borrower. A period
of time during which the borrower can exercise its right to sell
the life insurance policy to the service provider in a private sale--a
private sale period--will be set forth or otherwise described in
a manner that permits its calculation by one with ordinary skill
in the art. For example, in a preferred embodiment of the method
of the present invention, the private sale period will begin about
six months prior to the maturity date and end on or about the maturity
date.
[0089] Under a preferred embodiment of the method of the preferred
invention, the borrower may optionally have the right to sell the
life insurance policy to the service provider in a private sale
at one or more other designated times and/or upon the occurrence
of one or more other designated events. For example, the borrower
may have the right to sell the life insurance policy to the service
provider if an expense is incurred or accrued that causes the total
amount owed to the service provider to increase by an amount that
is greater than a designated percentage (preferably, approximately
ten percent) of the total amount owed to the service provider when
the borrower and the service provider enter into the service agreement,
for a purchase price equal to (1) amounts loaned to the borrower
by the lender for premium payments on the life insurance policy,
plus interest on such amounts as provided in the lender financing
agreements, and (2) the amount due under any optional advance note
to the service provider or the amount of any guaranteed payment,
if a guaranteed payment option was offered to and selected by the
borrower.
[0090] The novel private sale option of the method of the present
invention helps achieve certain objects of the invention by (1)
permitting the borrower to terminate its obligations to the lender
and the service provider by selling the life insurance policy to
the service provider, thereby ending its ownership of the life insurance
policy with minimal impact on its liquidity during its period of
ownership, and (2) reducing the risk of the transaction to the lender
(as lender, if the lender is the service provider) by providing
a market for the life insurance policy in an amount at least equal
to the private sale purchase price, i.e., its loans for premium
payments on the life insurance policy, plus interest on such loans,
as provided in the lender financing agreements.
[0091] Following the private sale of the life insurance policy
to the service provider, (1) the life insurance policy will be transferred
to the service provider as owner, and the service provider can thereafter
exercise any and all ownership rights with respect to the life insurance
policy, and (2) if a guaranteed payment option was offered to and
selected by the borrower, such guaranteed payment will be released
by the escrow agent to the borrower 34. In addition, the sale price
of the life insurance policy preferably will be paid to the collateral
agent 38. The collateral agent will receive the proceeds for the
benefit of the lender, the service provider and the borrower. Generally,
under the method of the present invention, the proceeds of a private
sale of the life insurance policy (the private sale purchase price)
will be distributed to the collateral agent, the lender, and/or
the service provider in accordance with the priorities set forth
in the security agreement. For example, in a preferred embodiment
of the method of the present invention, payment of the proceeds
of the sale of the life insurance policy to the service provider
of a private sale will be made as follows: (1) first, to the payment
of any unpaid fees due the collateral agent and then to all costs
and expenses of and relating to the exercise of any rights and remedies
under the security agreement; (2) second, to the payment of the
amount then due the lender under the lender financing agreements,
i.e., the outstanding principal balance of the note and unpaid accrued
interest thereon; and (3) third, to the payment of any optional
advance note 40.
[0092] Life Settlement Sale Option. In a preferred embodiment of
the method of the present invention, the borrower will have the
right on or near the maturity date, and at such other time or times
as the borrower and the service provider may agree, to obtain bids
for a life settlement sale of the life insurance policy, and the
further right and/or obligation to use the services of the service
provider in conjunction with obtaining such bids and/or consummating
any such sale 36. The service agreement will establish the rights
and obligations of the borrower and service provider with respect
to soliciting bids for and/or selling the life insurance policy
in a life settlement sale. For example, in a preferred embodiment
of the method of the present invention: (1) the service provider
may be obligated to solicit bids for and market the life insurance
policy following receipt by the service provider of the borrower's
notice of its intent to seek bids for the life insurance policy;
(2) the service provider may be obligated to notify the borrower
of all bids it receives for the life insurance policy; (3) the borrower
may be obligated to notify the service provider of its intent to
accept a bid to purchase the life insurance policy; (4) if the borrower
intends to accept a bid, the service provider may have the right
to match such bid; (5) the borrower may be obligated, if it accepts
any bid, to accept a bid that is the highest bid for the life insurance
policy; (6) the borrower may choose to reject all bids; (7) the
borrower may be obligated to use its best efforts to cause the insured
to cooperate in marketing and selling the life insurance policy,
including by the provision of accurate and up-to-date health information;
and/or (8) in the event of a transfer or sale of the life insurance
policy, the borrower may agree to provide such acknowledgements
or representations that may be necessary or desirable under applicable
state law, or otherwise desirable, such as (a) an acknowledgement
that such transfer or sale will be at a discount from the life insurance
policy's face amount, and (b) a waiver of any other alternatives
to obtain a value from the life insurance policy, including the
right to accelerated benefits or the right to surrender the life
insurance policy for its cash value.
[0093] In the event of a life settlement sale of the life insurance
policy, either to a third party or to the service provider (in the
event the service provider had and exercised a right to match the
bid the borrower intended to accept), then following the life settlement
sale of the life insurance policy, (1) the life insurance policy
will be transferred to the purchaser, as owner, and the purchaser
can thereafter exercise any and all ownership rights with respect
to the life insurance policy, and (2) if a guaranteed payment option
was offered to and selected by the borrower, such guaranteed payment
will be released by the escrow agent to the borrower. In addition,
the sale price of the life insurance policy preferably will be paid
to the collateral agent.
[0094] The collateral agent will receive the proceeds for the benefit
of the lender, the service provider, and the borrower 38. Generally,
under the method of the present invention, the proceeds of a private
sale of the life insurance policy will be distributed to the collateral
agent, the lender, the service provider and/or the borrower in accordance
with the priorities set forth in the security agreement. For example,
in a preferred embodiment of the method of the present invention,
payment of the proceeds of a life settlement sale of the life insurance
policy will be made as follows: (1) first, to the payment of any
unpaid fees due the collateral agent and then to all costs and expenses
of and relating to the exercise of any rights and remedies under
the security agreement; (2) second, to the payment of the amount
then due the lender under the lender financing agreements, i.e.,
the outstanding principal balance of the note and unpaid accrued
interest thereon; (3) third, to the payment of any optional advance
note; (4) fourth, to the payment of any unpaid amounts due to the
service provider under the service agreement, including the base
commission, but excluding the incentive commission; (5) fifth, to
the payment of any and all other accrued obligations of the borrower
to the lender or the service provider that are secured by the life
insurance policy; (6) sixth, the to the payment to the service provider
of any incentive commission owed to the service provider under the
service agreement; and (7) seventh, the remainder, if any, to the
borrower (or the person, persons, entity and/or entities otherwise
entitled to receive the borrower's share of such proceeds) 40.
[0095] No Action. The borrower may also choose not to take any
action on or near the maturity date, in which case the borrower
will ultimately be in default of its obligations to the lender under
the lender financing agreements 30 and, therefore, the collateral
agent may exercise its rights in the life insurance policy and its
proceeds for the benefit of the lender, the service provider and/or
the borrower, including but not limited to its right to sell the
life insurance policy. Preferably, in the event the collateral agent
elects to sell the life insurance policy as a result of the borrower's
default, the service provider will serve as the exclusive broker
to market and sell the life insurance policy and, in such event,
will be entitled to receive as compensation for its services the
base commission and the incentive commission, described above.
[0096] The collateral agent will receive the proceeds resulting
from its exercise of its rights in the life insurance policy for
the benefit of the lender, the service provider and/or the borrower
38. Generally, under the method of the present invention, such proceeds
will be distributed to the collateral agent, the lender, the service
provider and/or the borrower in accordance with the priorities set
forth in the security agreement. For example, in a preferred embodiment
of the method of the present invention, payment of the proceeds
resulting from the collateral agent's exercise of its rights in
the life insurance policy will be made as follows: (1) first, to
the payment of any unpaid fees due the collateral agent and then
to all costs and expenses of and relating to the exercise of any
rights and remedies under the security agreement; (2) second, to
the payment of the amount then due the lender under the lender financing
agreements, i.e., the outstanding principal balance of the note
and unpaid accrued interest thereon; (3) third, to the payment of
any optional advance note; (4) fourth, to the payment of any unpaid
amounts due to the service provider under the service agreement,
including the base commission, but excluding the incentive commission;
(5) fifth, to the payment of any and all other accrued obligations
of the borrower to the lender or the service provider that are secured
by the life insurance policy; (6) sixth, the to the payment to the
service provider of any incentive commission owed to the service
provider; and (7) seventh, the remainder, if any, to the borrower
(or the person or entity otherwise entitled to receive the borrower's
share of such proceeds) 40.
[0097] Phase Three
[0098] Phase three is used to describe the period of time following
the maturity date, if the borrower elects to redeem the life insurance
policy as described above. Phase three will continue until expiration
of the term of the service agreement.
[0099] Borrower's Obligations for Premiums and Expenses. If the
borrower elects to redeem the life insurance policy, as described
above, then unless the parties agree otherwise, the borrower will
be responsible for payment of any premiums on the life insurance
policy due following redemption of the life insurance policy.
[0100] Optionally, if additional premiums, adjustments to premiums,
or other required payments come due with respect to a life insurance
policy following redemption of the life insurance policy by the
borrower, the service provider may pay such premiums and, in such
event, such payments (referred to herein as a "maintenance
loan") will be deemed added to the obligations of the borrower
to the service provider under the service agreement, will be treated
as an additional deemed loan from the service provider to the borrower,
and interest will accrue on such payments at a rate and at such
provisions for compounding as the borrower and the service provider
may agree.
[0101] In addition, under the method of the present invention,
the service provider may pay, on behalf of the borrower, additional
trust administration and maintenance fees (if the borrower is a
trust) and/or fees due the collateral agent under the security agreement
and, in such event, such payments (referred to herein as a "transaction
loan") will be deemed added to the obligations of the borrower
to the service provider under the service agreement, will be treated
as an additional deemed loan from the service provider to the borrower,
and interest will accrue on such payments at a rate and at such
provisions for compounding as the borrower and the service provider
may agree.
[0102] Optional Sale of Life Insurance Policy. In a preferred embodiment
of the method of the present invention, following the redemption
of the life insurance policy, then until the expiration of the term
of the service agreement, the borrower 48 will (1) have the right
to offer to sell the life insurance policy to the service provider
for such price and on such terms and conditions as the borrower
and the service provider may agree 51, and/or (2) have the right
to obtain bids for a life settlement sale of the life insurance
policy, and the further right and/or obligation to use the services
of the service provider in conjunction with obtaining such bids
and/or effecting any such sale 52, in the manner described above.
[0103] In the event the life insurance policy is sold in a private
sale or a life settlement sale following redemption of the life
insurance policy, but prior to expiration of the term of the service
agreement, the sale price of the life insurance policy preferably
will be paid to the collateral agent 56. The collateral agent will
receive the proceeds for the benefit of the service provider and
the borrower. Generally, under the method of the present invention,
the proceeds of such a sale of the life insurance policy will be
distributed to the collateral agent, the service provider and/or
the borrower in accordance with the priorities set forth in the
security agreement. For example, in a preferred embodiment of the
method of the present invention, payment of the proceeds of the
life insurance policy received in such a sale of the life insurance
policy will be made: (1) first, to the payment of any unpaid fees
due the collateral agent and then to all costs and expenses of and
relating to the exercise of any rights and remedies under the security
agreement; (2) second, to the payment of any maintenance loan and/or
any transaction loan; (3) third, to the payment of any unpaid amounts
due to the service provider under the service agreement, including
the base commission, but excluding the incentive commission; (4)
fourth, to the payment of any and all other accrued obligations
of the borrower to the service provider that are secured by the
life insurance policy; (5) fifth, the to the payment to the service
provider of any incentive commission owed to the service provider
under the service agreement; and (6) sixth, the remainder, if any,
to the borrower (or the person, persons, entity or entities otherwise
entitled to receive the borrower's share of such proceeds) 56.
[0104] Death of the Insured. In the event the insured dies prior
to expiration of the term of the security agreement 54, the proceeds
of the life insurance policy paid as a result of the death of the
insured preferably will be paid to the collateral agent 58. The
collateral agent will receive the proceeds for the benefit of the
service provider and the borrower. Generally, under the method of
the present invention, the proceeds received as a result of the
death of the insured following redemption of the life insurance
policy will be distributed to the collateral agent, the service
provider and/or the borrower in accordance with the priorities set
forth in the security agreement. For example, in a preferred embodiment
of the method of the present invention, payment of such proceeds
of the life insurance policy may be made as follows: (1) first,
to the payment of any unpaid fees due the collateral agent and then
to all costs and expenses of and relating to the exercise of any
rights and remedies under the security agreement; (2) second, to
the payment of any maintenance loan and/or any transaction loan;
(3) third, to the payment of any unpaid amounts due to the service
provider under the service agreement, including the servicing fee;
(4) fourth, to the payment of any and all other accrued obligations
of the borrower to the lender or the service provider that are secured
by the life insurance policy; and (5) fifth, the remainder, if any,
to the borrower (or the person or entity otherwise entitled to receive
the borrower's share of such proceeds) 58.
[0105] Expiration of Term of Service Agreement. Following the expiration
of the term of the service agreement, under the method of the present
invention, the collateral agent will release the life insurance
policy to the borrower, and the borrower will thereafter hold the
life insurance policy free and clear of any rights or obligations
to the lender under the lender financing agreement, to the service
provider under the service agreement (including any optional advance
note), and/or to the collateral agent under the security agreement
50.
[0106] FIG. 4 is an example of a term sheet that might be provided
to a borrower practicing an embodiment of the method of the present
invention. The term sheet names the insured 64 and lists the life
insurance policies 66 that will be used in an embodiment of the
method of the present invention. The term sheet describes amounts
due by the borrower to the lender under the lender financing agreements
68. The term sheet lists an optional advance, to be paid by the
service provider to the borrower 70, and describes the base commission
72 and incentive commission 74 or the servicing fee 76 to which
the service provider may be entitled.
[0107] Use of Computers
[0108] Computers may be used in one or more embodiments of the
method of the present invention, in a variety of capacities. For
example, a computer may be used to calculate the amount of premium
anticipated to be due on the life insurance policy through the maturity
date. The service provider may use a computer to calculate the amount
of an optional advance to the borrower. The amount due the lender
by the borrower under the lender financing agreements can be calculated
using a computer. The private sale purchase price and/or the redemption
price can be calculated using a computer. The servicing fee, base
commission, and/or incentive commission can be calculated using
a computer. In general, it will be understood by one with ordinary
skill in the art that computers can be used to perform any one or
more of the calculations described herein when practicing an embodiment
of the method of the present invention.
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