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Insurance Abstract
A method for distributing dividend monies from an insurance policy,
such as a life insurance policy, to a policyholder. The method including
the determination of an internal value for the insurance company's
shares or other securities, offering the insurance company's shares
or other securities to the policyholder at the internal value, and
paying the dividend value in the form of the insurance company's
or other securities at the internal value.
Insurance Claims
1. A method for returning dividends from an insurance policy by
an insurance company to a policyholder, the method comprising: determining
an internal share value for shares of the insurance company; offering
the policyholder an option to take the dividends in the form of
shares at the internal value; and transferring the shares to the
policyholder at the internal value upon exercise of the option.
2. The method of claim 1, wherein the internal share price is a
GAAP book value of the shares.
3. The method of claim 1, further including determining an internal
value for the share price periodically prior to a dividend declaration.
4. The method of claim 1, further including receiving instructions
from the policyholder as to acceptance of payment in the form of
shares at the internal value for the dividends.
5. The method of claim 1, wherein the insurance policy is a life
insurance policy.
6. A method for a company to distribute dividends to a policyholder
of an insurance policy, the method comprising: determining an internal
value for a security of the company; offering the dividends in the
form of securities of the company to the policyholder; and transferring
rights to the securities of the company to the policyholder at the
internal value upon acceptance of offer by the policyholder.
7. The method of claim 6, wherein the security comprises shares
of the company and the internal value is a GAAP book value of the
shares.
8. The method of claim 6, wherein the insurance policy is a life
insurance policy.
9. The method of claim 6, further including periodically setting
the internal value for the security.
10. The method of claim 6, further including receiving instructions
from the policyholder as to acceptance of payment of the dividend
in the form of shares at the internal value.
11. A method for an insurance company to distribute dividends to
a policyholder of an insurance policy, the method comprising: determining
whether the policyholder is entitled to a dividend; determining
an internal value of a security of the insurance company; communicating
an option of payment of the dividend in the form of a security to
the policyholder at the internal value; receiving an instruction
from the policyholder exercising the option for payment of the dividend
as a security at the internal value; determining an amount of the
security for the dividend; and transferring rights to the amount
of the security to the policyholder.
12. The method of claim 11, wherein the security comprises shares
of the insurance company and the internal value is a GAAP book value.
13. The method of claim 11, further including periodically setting
an internal value for the security.
14. The method of claim 11, wherein the insurance policy is a life
insurance policy.
Insurance Description
CROSS-REFERENCE TO RELATED APPLICATION
[0001] This application claims the benefit of U.S. Provisional
Patent Application No. 60/783,334 filed on Mar. 17, 2006, incorporated
herein by reference.
FIELD OF THE INVENTION
[0002] The present invention relates to the distribution of dividends
paid on insurance policies, and more particularly to a method for
distributing dividends from a life insurance policy in the form
of securities of the insurance company.
BACKGROUND OF THE INVENTION
[0003] Life insurance policies are commonly issued by insurance
companies to policyholders under a variety of scenarios. Life insurance
policies on which dividends are paid, which are commonly referred
to as "participating" policies, offer the policyholder
a variety of traditional dividend options. For example, the dividend
can be paid in cash to the policyholder, left in an account with
the company to earn interest, used to purchase extended term insurance,
used to purchase additional paid-up insurance, or applied to the
payment of premiums and other options.
[0004] One advantage of dividends on life insurance policies is
that they are generally not subject to state or federal income taxes
because they are regarded as a return of premium to the policy holder.
Similarly, the proceeds of a life insurance policy, upon the death
of the insured, are generally free of state and federal income and
estate taxes, subject to certain limitations. However, if a policyholder
leaves monies received by a dividend in an account with the insurance
company, interest earned on dividends is generally taxable as ordinary
income.
[0005] Essentially, dividends are excess monies paid in the form
of premiums. In other words, premiums are paid by policyholders
based on an estimate by the insurance company on the "future
cost" of a policy. This future cost may include expenses related
to billing for and collecting premiums, administration, investment
costs, and death benefits based on mortality tables, less the expected
return on the invested premiums. Many insurance companies illustrate
the "net cost" to policy holders of life insurance by
deducting from the premiums paid over, for example, a period of
ten, twenty or more years, the historical level of dividends paid
in prior years.
[0006] In many instances, insurance companies set their premiums
at an amount equal to (a) the expected future cost of the policy,
(b) the anticipated dividends to be paid out, and (c) a profit factor.
The insurance commissions of the states, and similar authorities
in foreign countries in which an insurance company is domiciled
or incorporated, usually require that life insurance companies maintain
part of the invested premiums against anticipated policyholder benefits
as "reserves" and have at all times adequate levels of
capital and reserves in proportion to the amount of life insurance
sold. In many large life insurance companies, particularly mutual
life insurance companies, annual profits are about equal to the
amount of dividends paid to policyholders annually. As a result,
among the larger insurance companies, participating policies are
often offered at comparable premiums, dividend levels and projected
net costs.
[0007] If, however, for a particular individual the premium for
an insurance policy from one company is roughly the same as the
premium for an insurance policy from another company, and the dividend
in prior years of one company was historically larger, that company's
net cost for the policy would be more attractive to prospective
life insurance buyers than that of other companies. Accordingly,
since the prospect of higher dividends exists with one company's
policy over the other, this may result in more policies being purchased
from the company with higher dividends and lower net cost.
[0008] While participating life insurance policies provide insurance
against the event of death and are a regimented savings program,
they are not, however, considered to be a good investment. This
is mainly because the cost of commissions to brokers and agents
is significantly higher than that of other investment vehicles,
such as real estate, stocks, and bonds. For example, the commission
on a participating life insurance policy can vary from about 55%
to 100% or more of the first year's premium, and commissions on
renewals of the policy may also account for a significant percentage
of the premiums paid during the premium-paying life of the policy,
usually 5% to 10% of the first ten years' premiums. Consequently,
a life insurance product that provides a lower net cost and entails
less selling expense may be regarded as a better investment, and
increase its appeal to the public.
[0009] By increasing the appeal of a life insurance policy to the
public, greater numbers of insurance policies may be sold by a particular
insurance company, which result in greater revenues. In addition,
efficiencies may be obtained through greater numbers of policies,
such as a lower level of administrative and investment costs and
commissions.
[0010] A few life insurance companies offer Dividend Reinvestment
Plans, sometimes referred to as "DRIPS", under which a
policyholder may take the dividend in shares of the insurance company
at the market price on the anniversary date of the policy or some
earlier date, e.g., the first day of the month, the last day of
the prior calendar quarter, or the date the policyholder's dividend
application form is postmarked or received. Alternatively, the policyholder
may take the dividend at a small discount to the market price of
the shares at such a date, usually 1% to 10%. Since the market price
of a company's shares is subject to fluctuation based on a variety
of influences, however, market prices do not necessarily reflect
the intrinsic value and future earning power of the life insurance
company's shares. For example, events such as a merger of one life
insurance company into another, the acquisition of a promising non-life
insurance business, the acquisition of a business that starts losing
money, or unanticipated costs of the transaction, may affect the
market value of the life insurance company's shares to a lesser
or greater extent than the intrinsic book value of the shares resulting
from the merger or acquisition.
[0011] Policyholders applying dividends in DRIPS that offer registered
(marketable) shares at a small discount from the market price frequently
sell the shares to capture the discount, depressing the market value
of the shares, as they know the market value can decline and erode
or wipe-out gains from the discount thereby further affecting the
market value despite there being no direct change to the intrinsic
value of the company.
[0012] No income tax is customarily due on the dollar amount of
the dividend. However, income tax may be due on either the discount
from fair market value of the shares in the case of DRIPS or the
difference between the fair market value of the shares and the internal
value of the shares under the invention described herein, generally
on the effective date of the transaction in both cases.
[0013] The present invention offers an alternative to any of the
aforementioned investment methods. As will be discussed in detail
below, the present invention provides an investment approach that
is not subject to market price fluctuations, and relates more directly
to the intrinsic value of the insurance company.
SUMMARY OF THE INVENTION
[0014] The present invention relates to a method for returning
or paying out dividends from an insurance policy by an insurance
company to a policyholder in a manner designed to increase the attractiveness
of the policy to prospective buyers. The method comprises determining
an internal value for a share price or other security of the insurance
company, offering the policyholder the option of taking the dividend
on a policy in cash, or applying the same amount to the aforementioned
traditional dividend applications, or taking the taking the dividend
in the form of company shares or other securities at the internal
value.
[0015] One example of a value that can be used as the internal
value is the book value per share of the insurance company. This
can be determined in accordance with generally accepted accounting
principles, consistently applied, commonly referred to as GAAP book
value. Alternatively, the price may be otherwise determined by the
insurance company, and may be set periodically, e.g., monthly, quarterly,
annually or on some other date.
[0016] In a preferred embodiment, the GAAP book value is utilized
because takes into account the future profit to the insurance company
of the volume of life insurance issued and outstanding, assuming
an actuarially determined amount of claims which are expected to
be paid, policy lapses, such as due to non-payment of the premium,
and amortization of commissions payable to the life insurance agents
and brokers. As a result, the internal GAAP book value of a share
of common stock, for example, of a life insurance company is often
a better indicator of the company's worth than applying a multiple
of earnings to the current quarterly or annual net profit per share,
which may reflect investment gains and other temporal effects on
earnings, per share. The internal value of a share or other security
of a life insurance company can be obtained from within the insurance
company through its own published figure, from an agent of the company,
from a third party, or the like. For example, certain financial
information of a publicly traded company must be periodically reported
to the SEC and may be obtained from the SEC Edgar database.
[0017] The common stock or other equity securities of publicly-traded
life insurance companies often trade at a market price above a GAAP
book value because the market takes into account the intrinsic GAAP
book value of the company and its earnings per share and its demonstrated
ability to continue to sell insurance policies, which will increase
its book value in succeeding years. For example, if the GAAP book
value of a publicly-traded life insurance company is $10 per share,
the market price of its shares might be $15. If a policyholder was
entitled to a $100 annual dividend and exercised the option to take
10 shares at a price of $10 each, the policy holder would have shares
with a market value of $150. In order for the shares to be attractive
to a policyholder, they should be marketable (saleable) by the policyholder.
Typically, this requires that the shares or other security be registered
with the appropriate authority. For example, in the United States,
securities must be registered with the United States Securities
and Exchange Commission (SEC) and with the state in which the insurance
company is domiciled. Other securities regulations may require other
registration requirements. The marketability of the shares obtained
in this manner may also be subject to certain restrictions, such
as a lock-in period. To be marketable in other countries, the laws
regarding the marketability of saleability of securities will vary
from country to country and by province, state or other jurisdiction
thereof.
[0018] The effect of the sale of a life insurance policy in which
the holder has applied the dividend to buy shares of the insurance
company is that instead of paying out the dividend in cash, the
shares are delivered to the holder at the per share GAAP book value.
As a result, the life insurance company has, using the example given
above, $100 more of funds to invest. The dividends earned on the
$100 also increase the insurance company's future net profit per
share and increase its book value in subsequent years. Consequently,
a proportionate increase may occur in the market price of the shares
reflecting the increased book value and net profit per share of
the insurance company. Such an outcome may also enable an insurance
company to meet or exceed certain capital and cash reserve regulations,
such as a state insurance commission's "capital-to-premium"
ratio.
[0019] The policies of the insurance company also become more attractive
to policyholders than those of competitors not offering such an
option, enabling it to increase sales. Also, since the company's
policies are more attractive to prospective policyholders, the insurance
company may experience added economies of scale with its administrative,
investment and sales costs, further increasing its profits and,
hence, increasing its profit per share, GAAP book value and the
market price of its shares.
BRIEF DESCRIPTION OF THE DRAWINGS
[0020] In the drawings,
[0021] FIG. 1 is flowchart illustrating a method of distributing
insurance policy dividends according to a preferred embodiment of
the invention; and
[0022] FIG. 2 is a flowchart illustrating preferred steps of the
method of FIG. 1.
DESCRIPTION OF PREFERRED EMBODIMENT
[0023] The invention disclosed herein is susceptible to embodiment
in many different manners. Shown in the drawings and described in
detail hereinbelow is a preferred embodiment of the present invention.
The present disclosure, however, is an exemplification of the principles
and features of the invention, but does not limit the invention
to the illustrated embodiment.
[0024] Referring to FIG. 1, an embodiment of the method of the
present invention is described. The method comprises determining
or obtaining an internal value for a share price or other security
of the life insurance company as described in box 1. For example,
the internal value may be determined by the life insurance company
or obtained from a third part, such as an independent accounting
firm or an actuarial consulting firm. Next the insurance company
or an agent thereof, offers the dividend in the form of shares or
other security to the policyholder at the internal value as shown
in box 2. If the policyholder decides to accept the shares or other
security at the internal value, the shares or other security are
sold or otherwise transferred to the policyholder at the internal
value as shown in box 3.
[0025] A more detailed explanation of a preferred embodiment of
the present invention is discussed with respect to FIG. 2. This
preferred method 10 comprises several steps.
[0026] The insurance company, upon deciding to issue a dividend,
first determines whether a particular policyholder is entitled to
a dividend payment 14. This can be done by reviewing the insurance
policy of a policyholder 12. Alternatively, the insurance company
can utilize a system whereby notification is provided as to which
policyholders are entitled to a dividend. If the policyholder is
not entitled to a dividend, then the process ends 16 since no dividend
will be paid.
[0027] If, however, the policyholder is entitled to a dividend,
an internal value for company shares or other security is determined
or obtained 18. In this embodiment, the internal value is determined
based on the GAAP book value. As discussed above, the GAAP book
value takes into account the future profit to the insurance company
of the volume of life insurance issued and outstanding, assuming
an actuarially determined amount of claims which are expected to
be paid, policy lapses, such as due to non-payment of the premium,
and amortization of commissions payable to the life insurance agents
and brokers. The GAAP book value may be obtained from within the
insurance company through its own accounting procedures or from
a third party or the like, as described above. For example, the
GAAP book value may also be obtained from published figures in newspapers
or from filings submitted to the SEC and accessed from the SEC Edgar
database.
[0028] After obtaining the internal value for the share or other
security, the payment of a dividend and an option to receive the
dividend in the form of company shares or other securities at the
internal value is communicated to the policyholder 20. This communication
may be accomplished through any method available, such as mail,
electronic mail, telephone, etc. Preferably, the communication will
include all the necessary information required for the purchase
of a company share or other security, such as a mutual fund prospectus
or company annual report. For example, the life insurance company
can send the policyholder a notice on or about the policy's anniversary
date, which sets forth the dollar amount of the dividend, the internal
value of the shares (i.e., GAAP book value) and the number of shares
obtainable if the policyholder exercises the option by mailing the
notice, postmarked prior to the expiration date of the option, to
the life insurance company or its transfer agent.
[0029] A response to the dividend offer is then received from the
policyholder 22. Similar to the offer, the response can be received
via any known method, such as mail, electronic mail, or the like.
It is also possible for there to be a default procedure in place
such that if the policyholder does not respond within a fixed period
of time, that the dividend will be paid by check or applied to one
of the traditional dividend options, if earlier elected by the policyholder.
[0030] It is then determined whether the policyholder wishes to
purchase the share or other security 24. If the security is not
desired, the dividend money may be paid by check, deposited into
account 26, or any of the other dividend options discussed above.
If the policyholder's response is to purchase the shares at the
internal value, then the number shares that can be purchased at
the internal value is calculated 28, and the determined number of
shares delivered to the policyholder 30, or to a designee, such
as a bank or stock broker, or held by the life insurance company
in trust for the policyholder to be delivered upon written instruction,
or to one or more designated beneficiaries in the event of the policyholder's
death. The calculation of the number of shares may alternatively
be determined as part of the notice 20 to the policyholder.
[0031] It should be understood that such procedures may be conducted
by the insurance company itself, or on its behalf by an agent. For
example, the insurance company may utilize a bank, trust company,
brokerage firm or transfer agent to create and manage policyholder
accounts with publicly tradable shares of the insurance company's
stock. This will enable the policyholder to more freely trade the
acquired shares. However, to reduce transaction fees, the process
may be conducted entirely by the insurance company.
[0032] The foregoing description and the drawings are illustrative
of the present invention and are not to be taken as limiting. Still
other variants within the spirit and scope of the present invention
are possible and will be readily apparent to those skilled in the
art.
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