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Insurance Abstract
A method of funding and managing at least one fund of a plurality
of diverse life insurance policies issued by a plurality of investment
grade carriers, the at least one fund providing enhanced risk adjusted
investment return. The method performing the steps of: selecting
the plurality of life insurance policies for the at least one fund
without underwriting on the lives of the insured of each life insurance
policy; acquiring the selected plurality of life insurance policies
for the at least one fund; and managing the fund to maximize a financial
risk adjusted investment rate of return that provides equity level
returns with fixed income asset exposure.
Insurance Claims
1. A method of funding and managing at least one fund of a plurality
of diverse life insurance policies issued by a plurality of investment
grade carriers, the at least one find providing enhanced risk adjusted
investment return, the method comprising the steps of:selecting
the plurality of life insurance policies for the at least one fund
without underwriting on the lives of the insured of each life insurance
policy;acquiring the selected plurality of life insurance policies
for the at least one fund; andmanaging the fund to maximize a financial
risk adjusted investment rate of return that provides equity level
returns with fixed income asset exposure.
2. The method of claim 1, wherein the selecting step is performed
without underwriting on the lives of the insured of each life insurance
policy dependent on at least one of medical, lifestyle, financial,
personal, and random underwriting.
3. A method of funding and managing at least one fund of a plurality
of diverse life insurance policies issued by a plurality of investment
grade carriers, the at least one fund providing enhanced risk adjusted
investment return, the method comprising the steps of:acquiring
the plurality of life insurance policies for the at least one fund,
an original owner of each of plurality of the acquired life insurance
policies retaining an interest in the plurality of the acquired
life insurance policies in the at least one fund; andmanaging the
fund to maximize a financial risk adjusted investment rate of return
that provides equity level returns with fixed income asset exposure.
4. The method of claim 1, wherein the selecting step selects one
or more life insurance policies from a broad range of a plurality
of life insurance companies in accordance with a plurality of rules
that prevent selection of life insurance policies:issued less than
two years prior to the selection;not issued with a broad range of
investment grade "claims paying" ratings;on an insured
who is under 21 years of age;not designed for maximum persistency;do
not cover a broad range of risk classes selected from one of diversity
of duration, product type, and insured ages and gender; andwritten
on a "lapse supported" basis.
5. The method of claim 4, wherein the selecting step uses prior
knowledge of financial characteristics of the plurality of life
insurance companies and of the plurality of life insurance policies.
6. The method of claim 1, wherein the selecting step does not rely
on one or more of:variable life insurance contracts purchased by
trusts on the lives of a select group of employees covered by the
trust;life insurance policies for a benefit of a foundation taken
out on individual supporters of the foundation, the supporters being
grouped in one or more blocks; andvariable life insurance to fund
412(i) defined benefit plans.
7. The method of claim 1, wherein the selecting step further comprises
the steps of:determining how monetization proceeds will be used;reviewing
a first information selected from claims history, premium payment
history, and subaccount allocation;discarding the life insurance
policy if it is a modified endowment contracts (MEC) for a leveraged
fund;determining historical internal rate of return;discarding the
life insurance policy if the determined actual returns exceed the
current historical allocation strategy of the at least one fund;projecting
future death claims and future cash value growth;assessing an impact
of accepting this life insurance policy on the at least one fund's
other life insurance policies; andaccepting the life insurance policy
if that allocation limit percentage or the allocation of whole life
policies are not exceeded.
8. The method of claim 7, wherein historical internal rate of return
is determined on a continued basis with and without death claims.
9. The method of claim 7, wherein the impact is selected from one
of an effect on distribution by insurance company, product type,
death benefit, policy duration, subaccount offering, and concentration
of risk.
10. The method of claim 7, wherein life insurance policies that
are accepted in the at least one fund from one carrier are limited
by a preset percentage.
11. The method of claim 7, wherein if an original purpose of a
life insurance policy being selected is business, the selecting
step further comprises the steps of:reviewing second information
selected from a benefit being funded, a liability being unfunded,
financials of an owner corporation if the life insurance policy
is owned by the corporation, titles of the insured, geographical
distribution, issue date of policies, and state in which the life
insurance policy issued;discarding the life insurance policy if
any of the reviewed second information is improper;determining an
average age of insured and dispersion of actual ages around the
mean;comparing an actual male/female ratio to an underlying life
insurance policy guaranteed mortality table; anddetermining a total
death benefit by age.
12. The method of claim 11, wherein in the comparing step the life
insurance policy is discarded if the ratio does not coincide with
the table assumption when a unisex table is used.
13. The method of claim 1, wherein the selecting step further comprises
the steps of determining rules for selecting the life insurance
policies for the at least one fund.
14. The method of claim 13, wherein the rules determine at least
one of: a mortality and expense risk charge, a policy change provision,
a load structure Universal Life/Variable Universal Life, a loan
provision, a finance charge, broker compensation rates, how the
compensation rates are reflected in policy loads; a premium tax
rate; a deferral of payment provision; a guaranteed interest account,
a current cost of insurance rate structure; and assessment of subaccount
offerings.
15. The method of claim 1, wherein the selecting step further comprises
the steps of analyze characteristics of the insurer companies, the
characteristics being selected from at least one of financial strength
ratings, history of dividend performance, expected future dividend
performance, strength of management, and commitment to customers.
16. The method of claim 15, wherein the at least one fund comprises
institutional knowledge of the industry, which allows the at least
one fund to effectively gather and analyze the characteristics and
provide added value and enhanced risk adjusted investment rates
of equity level returns with fixed income asset exposure.
17. The method of claim 15, wherein the characteristics of the
insurer companies from which life insurance policies are accepted
into the at least one fund are U.S. domiciled;have investment grade
rating and a history of policy dividend actions;assess financial
strength of insurance companies and supportability of current dividend
scale;provide access to policy information on-line or telephone
automation, ease of adding new subaccounts, quick turn around to
process service requests, an additional amount of guaranteed issue,
and an additional amount under retention limits and reinsurance
programs; andoffer private placement products.
18. The method of claim 1, wherein the acquiring step accepts initial
equity from investors in the fund.
19. The method of claim 18, wherein the acquiring step comprises
the steps of:issuing a plurality of debt obligations; andreceiving
equity from purchasers of the plurality of debt obligations.
20. The method of claim 1, wherein the acquiring step acquires
the plurality of life insurance policies for cash.
21. The method of claim 20, wherein an amount to pay for the selected
life insurance policies is calculated based on the cash surrender
value of the selected life insurance policies.
22. The method of claim 1, wherein the acquiring step acquires
the plurality of life insurance policies by exchanging an equity
interest in the at least one fund for at least one life insurance
policy from the owner.
23. The method of claim 22, wherein a former owner of a life insurance
policy retains benefits of ownership while acquiring an interest
in the fund.
24. A method of funding and managing at least one fund of a plurality
of diverse life insurance policies issued by a plurality of investment
grade carriers, the at least one fund providing enhanced risk adjusted
investment return, the method comprising the steps of:acquiring
the selected plurality of life insurance policies for the at least
one fund; andmanaging the fund to maximize a financial risk adjusted
investment rate of return that provides equity level returns with
fixed income asset exposure by performing at least one of: surrendering
the life insurance policies that fail to meet financial expectations;
minimizing volatility in the financial return;continue selling equity
in the fund and debt securities for cash and/or traded in exchange
for life insurance policies; andproviding a monetization of the
cash values of the life insurance policies in a tax efficient manner.
25. The method of claim 1, wherein the managing step further comprises
a step of using a fund management technique selected from one ofoptimizing
the frequency of premiums; optimizing the timing of premiums;optimizing
the amount of premiums; fully surrendering life insurance policies;partially
surrendering life insurance policies; changing coverage options;changing
investment options; changing dividend options; using loan provisions
options;using non-forfeiture options; using other settlement options;
extending maturity;using debt; managing debt to assets; managing
cash flow; andusing derivatives to change beta of the portfolio.
26. The method of claim 1, wherein the managing step further mitigates
a downside investment risk, enhances performance of underlying fund
life insurance policies, normalizing death benefit cash flows and
creating equity level returns with fixed income asset exposures.
27. The method of claim 1, wherein by maximizing a financial risk
adjusted investment rate of return the managing step prevents early
termination of life insurance policies by allowing owners to monetize
investments in their life insurance policies without requiring execution
of life settlement contracts and viatical agreements, thereby preventing
ownership of existing life insurance policies by third parties and
encouraging retention of the original life insurance policies.
28. The method of claim 1, wherein by maximizing a financial risk
adjusted investment rate of return the managing stepavoids requiring
medical/lifestyle/personal underwriting of the lives insured; andavoids
relying on the expected near term mortality of the lives insured
as the source of investment returns.
29. The method of claim 1, wherein the managing step further comprising
the steps of:paying premium if an increase in a cash value due to
a payment of the premium is at least equal to a predefined percentage
of the premium;continuously comparing an internal rate of return
with and without death to determine if the premium should be paid,
skipped, or deferred; andcomparing internal rate of return across
a single life insurance policy, multiple life insurance policies
with similar product type, and multiple life insurance policies
with different product type.
30. The method of claim 29, wherein the premium is paid in cash,
by withdrawal of policy values, by internal borrowing, and by external
borrowing.
31. The method of claim 1, wherein the managing step further comprising
steps of maximizing returns for Variable Universal Life insurance
policies as follows:determining composition of an allocation strategy
selected from one of conservative, moderate, and aggressive;reviewing
subaccounts for the at least one fund;eliminating subaccounts that
do not meet minimum criteria;ranking subaccounts by an asset class
across all insurance companies;applying the allocation strategy
to best available subaccounts;working with at least one investment
adviser to hedge downside risk and negotiate fees;identifying deficiency
gaps in subaccount offering;identifying existing and creating new
subaccounts to fill the gaps;negotiating with a plurality of insurance
companies to add the new subaccounts;monitoring performance of the
subaccounts daily;reviewing composition of strategy at least monthly,
each insurance company's guaranteed interest and loan account crediting
rates monthly, strategy at least quarterly, and cost of hedges at
least quarterly;if any of the subaccounts consistently underperforms
relative to benchmarks,reviewing allocation percentage to the underperforming
subaccount monthly, andtaking appropriate actions at least quarterly;
andnegotiating with a plurality of insurance companies for fee and
other cost reductions, as appropriate.
32. The method of claim 31, wherein the sub-accounts are reviewed
by one of asset class selected from one of experience, tenure, assets
under management of a fund manager; performance selected from one
of historical returns vs. peer fund managers vs. market indices;
standard deviations; alphas/betas; expense ratios; Morningstar ratings;
and industry weightings.
33. The method of claim 1, wherein the managing step further comprising
steps of maximizing returns for Whole Life insurance policies as
follows:annually surveying of anticipated dividend actions;determining
impact on performance of the at least one fund by obtaining at least
one of in-force illustrations and projections;at least annually
reviewing allocation strategy between Whole Life and Variable Universal
Life products;determining if changes need to occur by performing
at least one of obtaining in-force illustrations and scenario testing,
the changes being selected from how dividends are applied and whether
to pay premiums; andimplementing changes as needed, by insured,
product, and insurance company.
34. The method of claim 1, further comprising a step of financing
new life insurance policies for individuals and corporations that
have sold their policies to the funds or exchanged their policies
for an interest in the fund.
35. The method of claim 34, wherein the new life insurance policies
are not acquired by the finds for a number of years after issue,
if ever acquired.
36. A method of using a computing device to perform funding and
management of at least one fund of a plurality of diverse life insurance
policies issued by a plurality of investment grade carriers, the
at least one find providing enhanced risk adjusted investment return,
the method comprising the steps of:using computer enabled instructions
to select the plurality of life insurance policies for the at least
one fund without underwriting on the lives of the insured of each
life insurance policy;using computer enabled instructions to acquire
the selected plurality of life insurance policies for the at least
one fund; andusing computer enabled instructions to manage the fund
to maximize a financial risk adjusted investment rate of return
that provides equity level returns with fixed income asset exposure.
Insurance Description
CROSS-REFERENCE TO RELATED APPLICATION
[0001]This application is based on and claims priority to U.S.
Provisional Patent Application Ser. No. 60/822,324, filed on Aug.
14, 2006 and entitled LIFE INSURANCE INVESTMENT FUND, the entire
disclosure of which is hereby incorporated by reference.
BACKGROUND OF THE INVENTION
[0002]The present invention relates to funding and operation of
an investment portfolio of finds of life insurance policies focused
on a fundamental investment opportunity provided by a life insurance
policy ownership.
[0003]By their nature, life insurance contracts are long term.
However, insurance companies will lose 35-45% of policies issued
in any given year by the fifth year; 50-60% of the policies by the
tenth year, and 70-80% of these policies by the twentieth year.
These high rates of lapse have a great impact on insurance companies'
costs, which translate into higher costs for life insurance policy
holders.
[0004]The above-described rates of loss are caused by the life
insurance policy holders that forfeit their policies for reasons
including: an inability to pay premiums, an urgent need for cash,
and change in investment and insurance needs. These reasons and
the life insurance policy holders' need to recoup whatever value
has vested in their policies, in fact, gave rise to the viatical
and life settlement companies. The viatical and life settlement
companies redeem to the life insurance policy holders amounts of
cash greater than what was inherent in their insurance policies,
i.e. the cash surrender value.
[0005]These developments are of foremost concern to the insurance
companies because third parties, i.e., viaticals and life settlement
companies, entities that perform extensive financial and medical
underwriting, yet have no insurable interest in the originally insured
life insurance policy holders become owners of the insurance policies.
[0006]The viatical and life settlement companies select and purchase
existing life insurance policies in accordance with the so-called
viatical settlement and life settlement provider programs that are
common in the life insurance industry. In accordance with these
programs, the existing life insurance policies of individuals with
relatively short life expectancies due to an illness and/or advanced
age are acquired. These policies are sometimes referred to as "impaired
lives".
[0007]The "impaired lives" life insurance policies are
generally owned by the individuals whose lives are being insured
and the viatical and life settlement companies purchase these life
insurance policies only following a medical review of the insured.
The "underwriting" decisions and the amount the viatical
and life settlement companies will offer to pay for such life insurance
policy, are based fundamentally on an assessment of mortality of
the insured.
[0008]Surrender or sale of a life insurance policy to the viatical
and life settlement companies is detrimental to the Insurance companies.
Continuous ownership by the insured, called "policy persistency",
will benefit the insurance companies by providing them with [0009]additional
income from collection of more premiums and/or more fees for providing
insurance coverage; [0010]additional investment income from investment
of the collected premiums and fees; [0011]lower expense unit costs
because [0012]1. there are more policies to spread costs to and
[0013]2. renewed policies are less costly to maintain than newly
issued policies; [0014]for Generally Accepted Accounting Principles
(GAAP) purposes, acquisition costs, which can be amortized more
slowly; [0015]less cash surrender values paid out; [0016]lower reserves,
which need to be set aside; and [0017]as a corollary, better mortality,
which would allow companies to lower their premium rates and/or
insurance charges.
[0018]While maintenance of the ownership by the insured ultimately
forces the insurance companies to pay higher dividends and death
benefits, this downside is outweighed by the above-listed benefits.
[0019]What is needed is a cost-effective solution to the life insurance
policy holders' changing financial needs that does not involve a
life insurance policy surrender or sale to the viatical and life
settlement companies. This solution should help eliminate premiums,
provide cash, or provide a better or different investment and/or
insurance solutions that will satisfy the life insurance policy
holders by [0020]1) helping to avoid ownership of existing life
insurance policies by third parties; [0021]2) encouraging retention
of the original life insurance policies by providing more attractive
returns to the life insurance policy holders and/or by reducing
overall costs [0022]a) without requiring medical/lifestyle/personal
underwriting of the lives insured, and [0023]b) without relying
on the expected near term mortality of the lives insured as the
source of investment returns; and [0024]3) building the funds without
relying on [0025]a) trusts that purchase variable life insurance
contracts on the lives of a select group of employees covered by
the trust, [0026]b) individual supporters of a foundation grouped
together in one or more blocks where insurance is taken out on the
group for the benefit of the foundation, and [0027]c) variable life
insurance to fund 412(i) defined benefit plans. [0028](The 412(i)
plan is a tax-qualified, defined benefit pension plan for business
owners and their employees that must be funded with a combination
of life insurance and annuities, or annuities alone.)
SUMMARY OF THE INVENTION
[0029]It is an object of the present invention to enable the owners
of the life insurance policies to monetize their investments without
requiring execution of life settlement contracts or so called viatical
agreements thereby preventing early termination of the individuals'
life insurance policies.
[0030]It is another object of the present invention to create life
insurance policies' funds funded by life insurance policies, wherein
the interest in these funds is exchanged to owners of the life insurance
policies for their policies.
[0031]It is still another object of the present invention to provide
the life insurance policies' funds that accept acquisitions of the
life insurance policies without requiring medical/lifestyle or personal
underwriting on the lives of these insured by these life insurance
policies.
[0032]It is a further object of the present invention to enable
the owners of the exchanged life insurance policies to purchase
new life insurance policies on terms more compatible with their
current circumstances.
[0033]It is still a further object of the present invention to
enable the created life insurance policies' funds to provide an
attractive return to investors in the funds.
[0034]Provided is a method of funding and managing at least one
fund of a plurality of diverse life insurance policies issued by
a plurality of investment grade carriers, the at least one fund
providing enhanced risk adjusted investment return. The method performing
the steps of: selecting the plurality of life insurance policies
for the at least one fund without underwriting on the lives of the
insured of each life insurance policy; acquiring the selected plurality
of life insurance policies for the at least one fund; and managing
the find to maximize a financial risk adjusted investment rate of
return that provides equity level returns with fixed income asset
exposure.
[0035]Other features and advantages of the present invention will
become apparent from the following description of the invention
that refers to the accompanying drawings.
BRIEF DESCRIPTION OF THE DRAWINGS
[0036]FIG. 1 is a flowchart showing the method steps of find initiation,
life insurance policy selection and fund management to maximize
risk-adjusted financial returns of an embodiment of the present
invention;
[0037]FIG. 2 is a flowchart showing the steps of life insurance
policy selection by adherence to rules set by an embodiment of the
present invention;
[0038]FIG. 3 is a flowchart showing exemplary steps of a process
for selection of insurance policies into leveraged and non-leveraged
funds;
[0039]FIG. 4 is a flowchart showing a process for determining adherence
of a design of the selected insurance policies to certain rules
and policies; and
[0040]FIG. 5 is a flowchart showing the steps of life insurance
policy fund management by adherence to rules set by an embodiment
of the present invention.
DETAILED DESCRIPTION OF EMBODIMENTS OF THE INVENTION
[0041]The present invention describes formation and management
of investment finds comprised of life insurance policies. The formation
is achieved through selection and acquisition of existing life insurance
policies. Importantly, the selection of life insurance policies
is achieved independent of medical, lifestyle, or personal underwriting
on the lives of those insured by these policies.
[0042]Equally important, the selected life insurance policies are
acquired without execution of the life settlement contracts or so
called viatical agreements, allowing the policy owner to maintain
ownership tax advantages of their exchanged policies.
Formation
[0043]FIG. 1 illustrates progression of formation and management
of the investment funds as achieved in a preferred embodiment of
the present invention. First, as indicated in step S110 various
fund types are established. The funds may be business entities,
for example limited partnership or limited liability companies.
Once legally set-up, each of the funds will acquire the life insurance
policies.
[0044]It is understood that as intended for the present application,
the funds may be funded by large amounts of diversified life insurance
policies from numerous investment grade life insurance carriers,
thereby spreading the risk, enhancing the safety of the investment,
and providing attractive risk adjusted investment returns to investors.
The life insurance policies may be acquired for cash or exchanged
for an interest in the funds, creating Cash and Exchange funds,
respectively. Step S112 illustrates the establishment of a Cash
fund. The initial equity may be contributed by the funds' investors.
In return, the funds' investors receive the investment and tax benefits
associated with the ownership of life insurance policies.
[0045]The cash amount paid for the life insurance policies in the
Cash funds will generally equal the cash surrender value of the
life insurance policy plus an additional amount generally expressed
as a percentage of the cash value. Initial equity required for acquisition
of the life insurance policies may be contributed by the funds'
partners and corporate investors, directly or through investment
vehicles of various forms.
[0046]Step S116 illustrates the establishment of an Exchange fund.
It is understood that while the owners of the exchanged life insurance
policies no longer retain the death, surrender, or investment return
benefits of their original policies and can no longer make changes
to their original policies, they retain life insurance policy ownership
tax advantages, receive proportionate share in the life insurance
policies' fund's cash flows and investment growth, and diversify
their investments.
[0047]Interest in the funds may be allocated in exchange for transfer
of the previously owned life insurance policies to the funds. In
the Exchange funds, the life insurance policies may be transferred
to the funds by the life insurance policies' owners in exchange
for an equity interest in the funds. Such exchange transactions
may be attractive to the owners of the life insurance policies for
the following reasons: [0048]1. the owners of the life insurance
policies may be able to retain some benefits of ownership, e.g.,
tax benefits, while at the same time diversifying their investment
by acquiring an interest in the life insurance policies issued to
other owners by diverse carriers; [0049]2. the exchange of the life
insurance policies for an equity interest in the funds is generally
intended to be exempt from Federal income tax; [0050]3. such exchange
transactions provide the inherent investment characteristics of
equity in the funds; [0051]4. the exchanged policies' cash values
may be leveraged and monetized by the fund with distributions made
to the previous life insurance policy owners, these distribution
are intended to be exempt from Federal income tax; and [0052]5.
the leveraged monetized cash values are intended to be an off balance
sheet item to the previous life insurance policy owners through
the issuance of non-recourse debt secured by the fund.
[0053]After the funds are established, the selection and acquisition
of life insurance policies, e.g., variable and fixed life insurance
policies, is initiated, as shown in step S118. Knowledge of the
insured ages and genders will be required for performing the selection
of the life insurance policies. Similarly, as discussed above, knowledge
of the financial characteristics of the life insurance policy and
the financial characteristics of the insurer will be required. After
selection and acquisition, the funds are managed to maximize financial
return in step S120.
Selection and Acquisition
[0054]It is understood that as intended for the present application,
the acquired individual or group life insurance policies may be
generally owned by or issued to private individuals, corporations,
banks, trusts, charitable organizations, employee benefit plan trustees
to insure the lives of their employees, and etc. Therefore, the
life insurance policies may be acquired from private individuals,
corporations, banks, trusts, charitable organizations, etc. Additionally,
applicable life insurance policies may include variable life insurance
policies that allow for investment discretion by the owner as well
as fixed life insurance policies that reflect the results of the
general account assets of the insurer.
[0055]The funds will adhere to rules regarding the types of life
insurance policies acceptable to the funds, for example, in one
embodiment the rules may be applied as illustrated in FIG. 2. The
selection of the life insurance policies, e.g., corporate and bank
owned variable and fixed life insurance policies, that were issued
by a broad range of investment grade insurers is initiated in step
S218 and culminates in the acquisition of the insurance policies
for a value calculated in step S292, either for cash or an interest
in the fund depending on the type of the fund.
[0056]That calculated value is based on the cash surrender value
of the life insurance policies. The rules for selection are shown
in steps S280-S290 and include determining and ensuring that the
selected life insurance policies adhere to the following: [0057]have
been issued more than two years prior to this acquisition, as in
step S280; [0058]have been issued by a broad range of insurers with
investment grade "claims paying" ratings, as in step S282;
[0059]the insured is 21 years of age or older, as in step S284;
[0060]have been designed for maximum persistency, as in step S286,
since these life insurance policies provide the best long-term financial
performance to the fund; [0061]cover a broad range of risk classes,
as in step S290, e.g., diversity of duration, product type, insured
ages and gender; and [0062]not written by an insurer under a "lapse
supported" pricing assumption, as in step S292, the funds'
management, to the best of its ability, will ascertain whether a
life insurance policy appears to be priced using a "lapse supported"
methodology.
[0063]Additionally, the acquired life insurance policies must cover
an acceptable range of insured ages and a broad range of investment
grade insurance companies and the funds must not "initiate"
life insurance policies to be purchased.
[0064]Furthermore, the funds will not require determination of
the mortality expectation of the insured under the life insurance
policy being acquired. This allows the funds to avoid violating
the privacy of the insured and thus avoiding medical underwriting/exams
and questionnaires, obtaining information from third-party medical
information services, and reviewing life style characteristics of
the insured.
[0065]During acquisition, the funds will analyze the financial
characteristics of the life insurance policies. For example, the
expected financial performance of the life insurance policies given
premium payments, guaranteed cash values, forecasted dividends,
variety and nature of investment options, variety and nature of
dividend options, variety and nature of settlement options, loan
provisions and loan interest, net present value analysis of premium
payments, cash values, etc.
[0066]An example of a selection process is illustrated in FIG.
3. As shown, in step S301, the original purpose of insurance is
determined. If the original purpose is personal, processing continues
in step S308. If the original purpose is business, in step S302
the policies are reviewed to determine if the benefit is being funded,
and whether the liability is unfunded. If the life insurance policy
is owned by a corporation, in step S303 financials of the owner
corporation are reviewed.
[0067]In step S304 titles of the insured; geographical distribution;
issue date of policies and state in which issued are reviewed. If
any of the information is found to be improper, the processing branches
to step S315 where the life insurance policy is not accepted. In
step S305 average age of insured and dispersion of actual ages around
the mean is determined. In step S306 actual male/female ratio is
compared to underlying life insurance policy guaranteed mortality
table, if unisex table is used, ratio should coincide with the table
assumption. In this step, if ratios are improper the processing
will branch to step S315 where the life insurance policy is not
accepted. In step S307 total death benefit by age are determined
and the processing is transferred to step S308 for a determination
of how monetization proceeds will be used is made.
[0068]In step S309 claims history, premium payment history, and
subaccount allocation are reviewed. In step S3 10, if the policies
being examined are modified endowment contracts (MEC) for a leveraged
fund, the selection process proceeds to step S315, where the life
insurance policy is discarded. Otherwise, if the policies are not
MECs or MEC for a non-leveraged fund, processing continues in step
S311 where historical internal rate of return on a continued basis
is determined with and without death claims.
[0069]In step S312 historical performance under fund's allocation
strategy is compared to actual returns. If the determined actual
returns exceed the current fund's allocation strategy, the life
insurance policy is discarded in step S315. Otherwise, in step S313
future death claims and future cash value growth are projected.
[0070]In step S314 impact of accepting this case on fund's other
limited partners, including effect on distribution by insurance
company, product type, death benefit, policy duration, subaccount
offering, concentration of risk is assessed. In accordance with
a preferred embodiment of the present invention, there may be limits
with respect to a percentage of the fund's policies that come from
one carrier. If that allocation limit percentage or the allocation
of whole life policies are exceeded, the life insurance policy is
discarded in step S315. Otherwise, in step S316, the life insurance
policy is accepted.
[0071]In addition, it is preferred that selected policies are designed
in accordance with certain rules. FIG. 4 illustrates a process for
determining the adherence to these rules. In accordance with the
sequence of steps in FIG. 4, the Whole Life policies are examined
in steps S401 and S409-S411 and Universal Life/Variable Universal
Life insurance policies are examined in steps S402-S411. Accordingly,
steps S409-S411 are used in common for the Whole Life and Universal
Life/Variable Universal Life policies.
[0072]In step S401 the Whole Life policies are examined to determine
if a finance charge applies to premiums paid other than annual Whole
Life. As stated, examination of the Whole Life policies continues
at step S409 described below.
[0073]Examination of Universal Life/Variable Universal Life policies
begins in step S402, where it is determined if mortality and expense
risk charge is daily or monthly and deducted from life insurance
policy values or from asset values. In step S403 it is determined
if a load structure is current versus guaranteed and if there is
a variation by duration and policy size. In step S404 broker compensation
rates are determined and also how the compensation rates are reflected
in the life insurance policy loads, e.g., a direct correlation.
In step S405 it is determined if a premium tax rate is actual or
average. In step S406 it is determined if guaranteed interest account
includes restrictions on transfers in/out, minimum guaranteed rate,
frequency, and guarantee period for currently declared rate. In
step S407 it is determined if the current cost of insurance rate
structure is reverse select and ultimate. And in step S408 subaccount
offerings are assessed to determine style box gaps, subaccounts
per style box, Morningstar ratings, experience, tenure and assets
under management for each fund manager, is subaccount proprietary
or not, fund expense ratios, annualized returns, standard deviations,
alpha, and beta versus peer fund managers and versus market indices,
industry weightings.
[0074]Examination of Whole Life and Universal Life/Variable Universal
Life policies continues in step S409, this step determines if a
loan provision has a low loan spread, fixed or variable rate, and
if any loan activity affects policy dividends. In step S410 it is
determined if a life insurance policy change provision is the original
date or current date change and/or offers flexibility to other product
types. And, in step S411, for a deferral of payment provision it
is determined how many days the insurer says it takes to process
a surrender, loan, death claim, or transfer, and what is a contractual
obligation.
[0075]Furthermore, the funds will analyze characteristics of the
insurers of the life insurance policies. For example, financial
strength ratings, history of dividend performance, expected future
dividend performance, strength of management, commitment to customers,
etc. Because of the funds' institutional knowledge of the industry,
the funds will effectively gather and analyze such information and
provide added value and enhanced risk adjusted investment rates
of equity level returns with fixed income asset exposure. It is
preferable that the policies accepted by the fund be issued by acceptable
U.S. domiciled insurance companies that [0076]have investment grade
rating; [0077]have a history of the life insurance policy dividend
actions; [0078]assess financial strength of insurance companies;
[0079]assess supportability of current dividend scale; [0080]provide
access to the life insurance policy information on-line or telephone
automation; [0081]provide ease of adding new subaccounts; [0082]provide
quick turn around to process service requests; [0083]offer private
placement products; [0084]provide an additional amount of guaranteed
issue; and [0085]provide additional amounts of insurance under retention
limits and reinsurance programs.
Management
[0086]After being established, all funds will be managed to achieve
the highest risk adjusted investment return possible for the investors.
For example, the funds will borrow capital, through issuance of
collateralized debt obligations or other institutional borrowings,
with the debt being secured by the already owned life insurance
policies. The leverage created through these borrowings and the
tax benefits associated with the ownership of life insurance policies
are intended to enhance the attractive returns that the funds provide
to the funds' investors.
[0087]It is anticipated that some of the previous owners of the
life insurance policies that have sold or exchanged their "obsolete"
life insurance policies may be interested in purchasing new life
insurance policies but using different insurance products or terms.
For such individuals or entities, the current invention provides
efficient means to do so.
[0088]In accordance with the present invention, the life insurance
investment funds are managed to enhance their performance, protect
downside investor risk, and generate cash value growth of the investment
funds that is consistent with equity level returns with fixed income
asset exposure. All these features are achieved while the acquired
life insurance policies remain in force and, importantly, the insured
lives persist. Further, the invention enables enhancement of risk
adjusted investment returns and provides a series of planning tools
through the use and application of leveraged and unleveraged exchange
funds of life insurance policies.
[0089]In accordance with one embodiment of the invention, the funds
are managed to maximize the funds' financial returns, provide protection
against downside risk, and normalize death benefit cash flows by
the following steps: [0090]1. performing dynamic life insurance
policy level reviews to determine if the life insurance policies
meet the financial performance expectations set by the fund; and
selling and/or surrendering the life insurance policies that fail
to meet financial expectations; [0091]2. to minimize the volatility
in the financial return, using derivatives to "balance"
a portfolio of [0092]a) fixed income life insurance, e.g. whole
life insurance; and [0093]b) equity-based life insurance, e.g. variable
life insurance, [0094]3. selling equity in the fund and debt securities
for cash and/or in exchange for life insurance policies. Additionally,
debt securities can be sold to maximize the financial return and
to provide a significant monetization of the cash values of the
life insurance policies in a tax efficient manner; [0095]4. purchasing
additional life insurance policies or receiving additional exchanged
life insurance policies that meet the financial objectives of the
funds and their investors. As discussed above in the Acceptable
Insurance Policies section, the fund will not acquire "newly
issued" life insurance policies that are less than two years
old; and [0096]5. Using fund management techniques on a policy by
policy basis, policies are managed to maximize investment returns.
Each life insurance policy will be managed by the funds as a discrete
security that is in the same manner as investment funds are holding
and managing corporations' shares. These techniques may include
the following: [0097]a) optimizing the frequency/incidence of premiums;
[0098]b) optimizing the timing of premiums; [0099]c) optimizing
the amount of premiums; [0100]d) fully surrendering life insurance
policies; [0101]e) partially surrendering life insurance policies;
[0102]f) changing coverage options; [0103]g) changing investment
options; [0104]h) changing dividend options; [0105]i) using loan
provisions options; [0106]j) using non-forfeiture options; [0107]k)
using other settlement options; [0108]l) extending maturity; [0109]m)
using debt; [0110]n) managing debt to assets; [0111]o) managing
cash flow; and [0112]p) using derivatives to change beta of the
portfolio and, etc.
[0113]The steps used in management of the funds are shown in FIG.
5. Step S500 illustrates that the funds will be borrowing capital
through issuance of collateralized debt obligations and other institutional
borrowings.
[0114]In step S502 the life insurance policies that fail to meet
financial expectations may be surrendered. In step S504 volatility
in the financial return is minimized. In step S506 equity in the
fund and debt securities is continuously sold for cash and/or in
exchange for life insurance policies. In step S508 a significant
monetization of the cash value of the life insurance policies in
a tax efficient manner is provided. The owners of life insurance
policies making up the fund may choose to purchase new life insurance
policies tailored to their needs. However, as discussed above, "newly
issued" life insurance policies will not be accepted in the
funds.
[0115]Finally, in step S510 additional management techniques are
shown which are envisioned for use on a policy by policy basis,
not case by case, or carrier to carrier. These techniques may include
the following: [0116]optimizing the frequency, timing, and amount
of premiums; [0117]fully or partially surrendering life insurance
policies; [0118]changing coverage, investment, and dividend options;
[0119]using loan provisions, non-forfeiture and other settlement
options; [0120]extending maturity; [0121]using debt; [0122]managing
debt to assets and cash flow; [0123]using derivatives to change
beta of the portfolio; and etc.
[0124]In particular, a criteria for premium payment in accordance
with an embodiment of the present invention may include the following
steps: [0125]1. paying premium if an increase in a cash value due
to a payment of the premium is at least equal to a predefined percentage
of the premium; [0126]2. on a continuing basis, [0127]comparing
internal rate of return with and without death, to determine if
the premium should be: [0128]a. paid--in cash, by withdrawal of
policy values (must specify source), by internal borrowing, and
by external borrowing; [0129]b. not paid--policy goes to reduced
paid up Whole Life and policy goes to extended term Whole Life;
and [0130]c. skipped or deferred entirely; and [0131]3. comparing
internal rate of return across a single life insurance policy, multiple
life insurance policies with similar product type, and multiple
life insurance policies with different product type.
[0132]In an example of one embodiment of the present invention
returns may be managed or maximized in accordance with the following
steps for Variable Universal Life policies: [0133]1. determine composition
of each allocation strategy, i.e., conservative, moderate, and aggressive;
[0134]2. for each product, review the subaccounts by asset class,
consider: [0135]experience, tenure, assets under management of find
manager, [0136]performance--historical returns vs. peer find managers
vs. market indices, [0137]standard deviations, [0138]alphas/betas,
[0139]expense ratios, [0140]Morningstar ratings, and [0141]industry
weightings; [0142]3. eliminate subaccounts that do not meet minimum
criteria; [0143]4. rank subaccounts by asset class across all carriers;
[0144]5. apply allocation strategy to "best available"
subaccounts, i.e. waterfall; [0145]6. work with investment adviser
to hedge downside risk and negotiate fees; [0146]7. identify gaps
or deficiencies in subaccount offering; identify existing subaccounts
or work with fund families to create new subaccounts that can fill
those gaps; negotiate with various carriers to add these subaccounts
[0147]8. monitor subaccount performance daily; [0148]9. review [0149]composition
of strategy at least monthly, [0150]each carrier's guaranteed interest
and loan account crediting rates monthly, [0151]strategy at least
quarterly, and [0152]cost of hedges at least quarterly; [0153]10.
if any subaccount consistently underperforms relative to benchmarks,
review allocation percentage to that subaccount monthly, and take
appropriate actions at least quarterly; and [0154]11. negotiate
with various carriers for fee and other cost reductions, as appropriate.
[0155]Returns for Whole Life policies may be managed or maximized
in accordance with the following steps: [0156]1. conduct annual
survey of anticipated dividend actions; [0157]2. determine impact
on find performance by obtaining in-force illustrations or, if not
available, projections; [0158]3. review allocation strategy between
Whole Life and Variable Universal Life products at least annually;
[0159]4. obtain in-force illustrations or perform scenario testing
to determine if any changes, such as, how dividends are applied,
whether to pay premiums, etc. need to occur; and [0160]5. implement
changes as needed, by insured, product, carrier
[0161]For managing or maximizing both Whole Life and Variable Universal
Life products the following steps are used: [0162]1. reports from
rating agencies are monitored to detect potential negative statements
and/or downgrades; [0163]2. smoothing incidence of death claims
and creating more regular cash flow by pooling more lives; [0164]3.
mitigating carrier risk by spreading policies across multiple insurance
companies; and [0165]4. diversifying investment risk by product
type, equity, and fixed income styles.
[0166]It is further understood that those skilled in the art can
easily implement processes, procedures, and steps discussed in this
application as computer controlled programs of instructions executed
on commonly used computing devices. These computing devices may
include single and/or multiple processor; single and/or multiple
storage devices; memory in the amount sufficient to execute the
method of the invention; any necessary peripheral, input, and other
essential devices. Further, the computing devices may be used as
a stand-alone unit or distributed over local or wide area networks,
e.g., the Internet.
[0167]The computer programs may, for example perform the steps
for selecting the life insurance policies to populate the funds;
perform acquisition of the selected life insurance policies; and
perform the steps necessary to manage the funds, for example to
maximize a financial risk adjusted investment rate of return that
provides equity level returns with fixed income asset exposure.
[0168]Although the present invention has been described in relation
to particular embodiments thereof, many other variations and modifications
and other uses will become apparent to those skilled in the art.
It is preferred, therefore, that the present invention not be limited
by the specific disclosure herein. |