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Insurance Abstract
Survival risk insurance is purchased by a separate account in which
variable life insurance policies are invested in order to assure
the benefits of such variable life insurance policies will be available
per assumptions made in a funding strategy. Alternatively, survival
risk insurance may be purchased by the general account of a life
insurance company to offset guarantees made in the insurer's traditional
life insurance policies to pay benefits per a death benefit schedule
established at the time such life insurance was issued. Such funding
strategy is a strategy that relies on the death benefits of such
variable or traditional life insurance policies being paid according
to a schedule projected by a modeling program.
Insurance Claims
1. A method for a purchasing entity to fund a program relying on
insurance policy death benefits, said program having a cash flow
requirement, said method comprising the steps: a) purchasing one
or more variable life insurance policies from an insurance company
on one or more lives on which said purchasing entity has an insurable
interest, said one or more variable life insurance policies comprising
a Separate Account, and wherein said life insurance policies: i)
are owned by said purchasing entity, and ii) provide that life insurance
benefits may be fully or partially payable to said purchasing entity;
b) paying the premiums required by the insurance company to keep
said one or more variable life insurance policies in force; c) requiring
that said Separate Account has terms, conditions, and a management
policy that allows said Separate Account to purchase Survival Risk
Insurance with respect to at least one of said one or more variable
life insurance policies from a Survival Risk Insurance provider
with survival risk benefits that will be paid to said Separate Account;
and d) calculating on a computer i) the expected timing and amount
of payment of said life insurance benefits to said purchasing entity;
and ii) the amount and conditions under which said Survival Risk
Insurance benefits will be paid to said Separate Account; and e)
determining whether or not said payment of said life insurance benefits
and the funds in said Separate Account will meet said cash flow
requirement.
2. The method of claim 1 wherein said Survival Risk Insurance is
categorized into distinct underwriting classes based on one or more
of the following characteristics: a) the specified period of the
survival risk insurance policy; b) the amount of survival risk benefit;
c) the age of the insured lives; d) the sex of the insured lives;
and e) whether or not the insured lives smoke.
3. The method of claim 1 wherein said purchasing entity contracts
with said Survival Risk Insurance provider to assign its interest
in the death benefit of said variable life insurance policies to
said Survival Risk Insurance provider with respect to any insured
life on whom a survival risk benefit has been paid by said Survival
Risk Insurance provider.
4. A method for a purchasing entity to fund a program relying on
insurance policy death benefits, said program having a cash flow
requirement, said method comprising the steps: a) purchasing one
or more life insurance policies from an insurance company on one
or more lives on which said purchasing entity has an insurable interest,
wherein said one or more life insurance policies invest in the General
Account of said insurance company and wherein said life insurance
policies: i) are owned by said purchasing entity; ii) contain an
option, benefit, or rider that guarantees that either the death
benefit or an amount equal to the death benefit will be paid on
a date determined at the time the insurance policy was issued either
fully or partially to said purchasing entity; and iii) provide that
life insurance benefits may be fully or partially payable to said
purchasing entity; b) paying the premiums required by the insurance
company to keep said one or more life insurance policies in force;
c) requiring that said General Account has terms, conditions, and
a management policy that allows said General Accounts to purchase
Survival Risk Insurance with respect to at least one of said one
or more variable life insurance policies from a Survival Risk Insurance
provider with survival risk benefits that will be paid to the General
Account; and d) calculating on a computer i) the expected timing
and amount of payment of said life insurance benefits to said purchasing
entity; and ii) the amount and conditions under which said Survival
Risk Insurance benefits will be paid to said General Account; and
e) determining whether or not said payment of said life insurance
benefits and the funds in said General Account will meet said cash
flow requirement.
5. The method of claim 4 wherein said purchasing entity contracts
with said Survival Risk Insurance provider to assign its interest
in the death benefit of said life insurance policies to said Survival
Risk Insurance provider with respect to any insured life on whom
a survival risk benefit has been paid by said Survival Risk Insurance
provider.
Insurance Description
CROSS-REFERENCE TO RELATED APPLICATION
[0001] The instant application is a continuation in part and claims
the benefit of pending U.S. non-provisional patent application entitled
"Survival Risk Insurance", Ser. No. 11/197,251, filed
Aug. 4, 2005. Said non-provisional patent application "Survival
Risk Insurance" is a divisional of U.S. non-provisional patent
application "Method of Calculating Premium Payment to Cover
the Risk Attributable to Insureds Surviving a Specified Period",
Ser. No. 10/743,201 filed Dec. 22, 2003, now U.S. Pat. No. 6,999,935.
Said non-provisional patent application "Method of Calculating
Premium Payment to Cover the Risk Attributable to Insureds Surviving
a Specified Period" claims priority to U.S. provisional patent
application "Method of Calculating Premium Payment to Cover
the Risk Attributable to Insureds Surviving a Specified Period",
Ser. No. 60/507,170 filed Sep. 30, 2003.
[0002] The instant application also claims priority to pending
U.S. provisional patent application entitled "Method for Using
a Survival Risk Insurance Policy as Part of a Variable Life Insurance
Policy Investment Option", Ser. No. 60/878,369 filed Jan. 3,
2007.
[0003] All of said patent applications which the instant application
claims priority to are incorporated herein by reference.
FIELD OF INVENTION
[0004] The invention relates to the field of financial products
and methods involving the provision of death benefits through life
insurance. As used in this invention, the expression "life
insurance" relates to the type of insurance policy that provides
a death benefit if the life or lives insured by the policy die while
the insurance policy is in force or effect.
BACKGROUND OF THE INVENTION
[0005] Life insurance companies, through the issuance of life insurance
policies, accept a transfer of the risk of adverse financial consequences
which would be created when an insured life dies. Typically, the
death of an individual creates adverse financial consequences for
those who depend on future income or work contributions lost as
a result of the individual's death. A life insurance policy is typically
purchased to provide a beneficiary with a death benefit payment.
The purpose of the death benefit payment is to provide the beneficiary
with the means to offset, at least in part, the financial strain
created by the unexpected or untimely early death of the insured
life.
[0006] Life insurance pricing (that is, the determination of the
premium charged by the insurance company for the acceptance of a
stated death benefit risk) is based on a number of factors for which
assumptions are made including: mortality, interest, expenses, and
policy persistency. Policy persistency is the probability that the
owner of a life insurance policy will choose to keep the policy
in force by paying the premiums required as per the terms of the
insurance contract. A policyholder who does not persist is said
to have lapsed. An assumption with respect to lapse rates is typically
the way persistency is incorporated into pricing calculations. Pricing
assumptions are made prior to the issuance of a life insurance policy
and are made relative to an entire class of insured lives and not
with respect to individual insureds.
[0007] A number of different sets of pricing assumptions may be
used. Assumption sets may vary by mortality class, type of distribution
used, or by other characteristics commonly used to distinguish between
classes of insured lives in the insurance industry. For example,
different mortality assumptions may be applied to males versus females
or to non-smokers versus smokers. Those skilled in the art are well
aware of the fact that many other mortality class distinctions exist
or are possible.
[0008] Also, different expense assumptions may be applied in different
marketing situations. For example, insurance offered directly to
the consumer in a direct marketing distribution channel versus insurance
offered through a traditional agent based distribution channel will
have different expense assumptions applied to reflect the different
expected costs in these different marketing channels.
[0009] The interest rate assumptions used in pricing are important
because they provide an adjustment for the timing differences between
when cash goes into and out of the pricing calculations.
[0010] Persistency or lapse assumptions affect pricing calculations
by creating an expectation with respect to the occurrence of cash
flows which are dependent on the insurance policy being in force
or effect.
[0011] When an individual insured applies for life insurance, an
underwriting process is applied. The underwriting process determines
the appropriate premium or underwriting class for the applicant
based on an evaluation of the applicant's mortality characteristics
and life expectancy. This is based in part on expertise the underwriter
derived from prior training or experience. Life expectancy is the
average number of years individuals in the same underwriting class
can be expected to live. Maximum life expectancy is the highest
age to which an individual in the underwriting class can be expected
to live.
[0012] A life insurance policy may provide for some change in assumptions
after the policy is issued. Such changes would modify the current
charges or credits provided for in the policy for a class of insureds.
These changes would result in a change in the overall cost of the
life insurance for each insured in the same class of insureds. Such
changes can only be justified by changes in experience after issue
for the whole class to which an insured belongs and can only be
applied to all insurance policies in the class. Typically the range
of change allowed in a life insurance policy is limited by minimum
or maximum guarantees made in the life insurance contract or policy
relative to each assumption that may be changed.
[0013] One type of life insurance policy contains an endowment
feature. This type of life insurance policy is called an endowment
policy. With respect to such life insurance, the insurance company
would pay an amount called the endowment benefit to the insured
on the endowment date, for example age 65, if the insured survived
to that date. The assumptions used in pricing a life insurance policy
include an assumption regarding the maximum life expectancy of the
lives insured. For many currently issued life insurance policies,
this maximum life expectancy has been assumed to be age 100. More
recent mortality tables used for life insurance pricing purposes
are beginning to recognize longer maximum life expectancies, for
example, age 120. These longer maximum life expectancies are made
possible by improvements in health care and a general improvement
in the health of the insured life population. Mortality tables developed
for purposes other than life insurance pricing may have found it
convenient to make assumptions regarding the maximum life expectancy
different from age 100. For example, annuity products may use mortality
tables for pricing purposes with a maximum life expectancy greater
than age 100.
[0014] This maximum life expectancy age is often referred to as
the maturity age for the life insurance policy. Any insured who
survives to the end of this period can be thought of as reaching
the ultimate endowment age. Typically, life insurance companies
will make the death benefit of the life insurance policy available
in some way to insureds who survive to the maturity age. One alternative
is to pay an amount equal to the death benefit at the maturity age
directly to the insured as an endowment benefit on the maturity
date. Another alternative is for the insurance company to hold such
a maturity age endowment benefit in an interest bearing account
until such time as the insured actually dies. Then the benefit is
paid as a death benefit.
[0015] In the past, the value in a life insurance policy was determined
only by the contractual terms of the life insurance policy and confined
to the relationship the owner of the policy had with the insurance
company providing it. Recently, however, secondary markets for life
insurance policies have developed in which a life insurance policy
is purchased or the right to receive the death benefit is assigned
to a third party by the owner of the policy in exchange for a fee
or purchase price.
[0016] Examples of the operation of secondary markets can be seen
in the life settlement market and viaticals. These markets involve
life insurance policies on insured lives that become impaired after
their policies were originally issued. In these markets, life insurance
policies are purchased by third parties (that is, neither the owner
of the policy nor the insurance company issuing the policy) or assigned
to third parties for a fee or payment of some sort. For such payment
the third party receives the right to receive the policy death benefit
when the insured dies.
[0017] An impaired life is an insured life that develops an impairment
after the life insurance policy was originally issued which reduces
the insured's life expectancy. An impairment is any medical condition
affecting the health status of the insured life which results in
a higher mortality rate for the insured life than was reflected
in the original mortality assumption made for the underwriting class
the insured was assigned to when the insurance policy was issued.
Because of the impairment acquired after original issuance of the
policy, the likelihood of an earlier than expected death claim is
increased. This situation may make life insurance policies covering
such impaired lives worth more than the cash surrender value provided
by the contractual terms of the policies.
[0018] The cash surrender value of a life insurance policy is the
amount of money the life insurance company that issued the policy
is willing to pay if the policy is lapsed or surrendered. A life
insurance policy is lapsed if the owner of the policy stops paying
the premiums required to keep the policy in force per the terms
of the life insurance contract. For a typical term life insurance
policy or whole life insurance policy, the policy lapses when the
owner stops paying the contractually required premiums. A whole
life insurance policy may have a cash value at the time it lapses
which can be surrendered and paid to the policy owner in cash or
applied by the policy owner under one of the nonforfeiture options
contained in the policy contract.
[0019] For a universal life or variable universal life insurance
policy with a flexible premium structure, the policy lapses when
the cash value of the policy becomes insufficient to cover the insurance
related charges specified in the policy contract. Typically this
occurs because the policy owner has not made premium payments prior
to the lapse sufficient to keep the policy cash value large enough
to cover said charges.
[0020] A life insurance policy can be surrendered by an owner who
voluntarily agrees to terminate the life insurance protection provided
by the policy in exchange for the payment of the policy's cash surrender
value. A life insurance policy's cash surrender value is the cash
value of the policy defined in the life insurance contract adjusted
for any amounts owed by the owner to the insurance company (for
example, policy loans) or any additional amounts owed by the insurance
company to the owner (for example, dividends). For universal and
variable universal life insurance forms of insurance there may also
be specifically stated surrender charges which are deducted to determine
the cash surrender value.
[0021] Life insurance benefits may also be assigned to third parties
in insurance marketing programs in which life insurance is used
as a funding mechanism by a benefit plan sponsor. The benefit plan
sponsor is a third party who pays for or in some other fashion enables
benefits related to the life or health of an individual or individuals.
The benefits provided by the benefit plan sponsor consist of cash
payments designed to fund health, retirement, or death needs. Funding
mechanisms which utilize life insurance benefits rely either on
the cash values built up within a set of life insurance policies
or the life insurance policies' death benefits to meet funding requirements
for a benefit plan.
[0022] Benefit plans may be funded with the expectation of full
or partial funding cost recovery via anticipated or expected death
benefit proceeds from the life insurance policies. When death benefit
proceeds are used to reduce or recover the cost attributable to
benefit plans, it is important that the death proceeds be received
in a predictable manner based on a set of mortality assumptions
chosen by the benefit plan sponsor. Such chosen mortality assumptions,
however, are often inaccurate due to the fact that the actual mortality
experience for a selected group is difficult to determine because,
generally, such data is not publicized by the insurance companies
or reinsurance companies that collect the data.
[0023] Many benefit plans involving the use of life insurance policies
as a funding vehicle do not take into account changes in the health
status of the insured lives after the insurance policies were issued.
That is, they do not rely for their value on the insured life becoming
impaired. In order for life insurance policies to be an effective
funding tool in programs in which death proceeds are the funding
source, however, the death benefits actually received must be reasonably
close to the death benefits expected based on the mortality assumptions
used to set up the program.
[0024] It is well recognized that for the financial products created
by the use of life insurance death proceeds as a funding vehicle,
adverse financial consequences are created if the actual mortality
experience of the lives insured under the life insurance policies
being used is better than assumed. That is, adverse financial consequences
are created for the third parties if the insured lives, as a group,
live longer than expected. This can occur, for example, if a financial
product is created by the purchase of a pool of life insurance policies
insuring a group of insureds who have lives that are impaired at
the time of purchase but who ultimately as a group live longer than
expected. The investors providing the cash used to make these purchases
are expecting a return on the money they have invested. The return
the investors receive is derived from the death benefits that are
paid on the life insurance policies that were purchased with the
cash they provided. This return is expected to consist of the return
of their invested principal plus an investment return. The amount
of the investment return or income the investors receive is dependent
on the amount and timing of the actual death benefit proceeds received
from the group of policies purchased. A purchase price value is
calculated for the policies being purchased which is based on mortality
assumptions from which the timing and amount of expected future
death proceeds can be projected. In addition, other expense and
risk charge assumptions are typically made in order to determine
a final purchase price for such life insurance policies.
[0025] Since it is the death proceeds of the group of policies
purchased which provide the revenue to pay back to the investors
their principal and a return on their investment, the actual death
proceeds must be reasonably close to the expected death proceeds
in amount and timing for the expected investment return to be realized.
In a life settlement transaction, the investors would experience
adverse financial consequences if the insured lives experienced
better mortality as a group than the mortality assumption used to
determine the purchase price for the policies.
[0026] Another example of when a set of insureds living longer
than expected would have adverse financial consequences for a third
party beneficiary, would be a situation in which a benefit plan's
funding was dependent on the actual death proceeds from a life insurance
policy or group of life insurance policies for which the insured
or insureds health was not impaired. The benefit plan sponsor anticipates
receiving life insurance policy benefits in an expected manner with
respect to timing and amount. Such expectation would be based on
the assumed level of mortality used in establishing the benefit
plan's funding. Death benefit proceeds received by the plan sponsor
later than expected, in lower amounts, or not at all would result
in adverse financial consequences to the benefit plan sponsor since
this would result in the benefit plan being under funded.
[0027] The financial risk that an owner of a life insurance policy
or a third party beneficiary faces from a set of insured lives living
longer than expected is referred to herein as a "survival risk".
[0028] Insurance policies are purchased in the life settlement
market by individuals or entities as investments. Such purchased
policies may be placed into a life settlement pool in which many
investors participate. The purchase price paid is such that the
present value of the future death benefits expected from the policies
in a life settlement pool exceeds the purchase price by the present
value of investment income desired by the pool participants. Investors
will receive their desired investment return if the actual experience
of the life settlement pool is exactly as expected or assumed. If
actual mortality experience is better than expected, then the investors
were earn less than expected. If experience is worse, the investors
will do better.
[0029] The risk to investors in a life settlement pool that mortality
will be better than expected is referred to as "survival risk".
The need for a method of insuring against the adverse financial
consequences of survival risk has been addressed in U.S. Pat. No.
6,999,935 entitled "Method of Calculating Premium Payment to
Cover the Risk Attributable to Insureds Surviving a Specified Period"
issued on Feb. 14, 2006. The Survival Risk Insurance (SRI) product
described in that patent is an insurance product under which the
risk of survival and the adverse financial consequences of survival
longer than expected are transferred from one entity to another
entity willing to accept that survival risk for a premium.
[0030] Mortality assumptions are used to calculate the purchase
payment for life insurance policies in the life settlement market
or to determine an investment share in a life settlement pool. For
a premium, SRI transfers the risk that such mortality assumptions
are better than expected from the investor to a survival risk insurance
provider. This, thereby, makes life settlements a less risky investment
to the investor.
SUMMARY OF THE INVENTION
[0031] The Summary of the Invention is provided as a guide to understanding
the invention. It does not necessarily describe the most generic
embodiment of the invention or all species of the invention disclosed
herein.
[0032] A new use for survival risk insurance is explained in the
following.
[0033] Variable Life Insurance (VLI) is a form of life insurance
in which the premiums paid by a policyowner are allocated by the
policyowner to one or more Separate Accounts of the life insurance
company. Variable Universal Life (VUL) insurance is a form of VLI
(included in the category VLI) in which the premiums paid by the
policyowner are flexible either in timing, frequency, or amount.
The assets in each sub-account or division of the Separate Account
are invested in shares of an underlying mutual fund. The Separate
Account of the insurance company, if the VUL contract is available
through a public offering, is registered as an investment company
(typically a unit investment trust) under the Investment Company
Act of 1940 (the 1940 Act).
[0034] VLI may also be offered in a form that is not part of a
general public offering (not distributed by prospectus to the general
public). Instead, it's a private offering, available only to qualified
purchasers. These qualified purchasers are people of substantial
economic means (as defined by federal securities laws) and are presumed
to have investment savvy. The term private placement has been commonly
used to describe this type of offering.
[0035] VLI insurance policies do not now but may include Separate
Accounts that invest in Survival Risk Insurance (SRI) policies.
Such investment in SRI would benefit the VLI policy owner when such
owner was using the anticipated or expected VLI policy death benefit
as a funding mechanism. The purchase of SRI by the Separate Account
will guarantee a benefit whether or not the insured life lives or
dies as expected.
[0036] Similarly, survival risk insurance may be purchased by an
insurance company's General Account to assure that the death benefits
provided by such insurer's traditional life insurance products (for
example: traditional whole life or universal life) will either provide
a death benefit per a schedule of death benefits projected by a
model or will provide a survival benefit at a time when a death
benefit was projected to be paid by the model. Such model would
be a computer implemented calculation using assumptions, for example
mortality and interest assumptions, to project the timing and present
value of such death benefits. Such survival benefit is the benefit
provided under the terms and conditions of a survival risk insurance
policy.
[0037] A primary object of the invention is to provide a method
to utilize survival risk insurance as an investment option within
a variable life insurance contract Separate Account or a traditional
life General Account in order to minimize or eliminate the survival
risk to policyowners who may be using the policy death benefit as
a funding strategy.
[0038] An entity (for example a corporation or a bank) may purchase
VLI policies on lives on which the entity has an insurable interest.
The premium paid into the contracts after deduction of any front
end expenses or charges, which may be expressed as a percentage
of the premium or as a fixed dollar charge per policy or per thousand
of insurance in force, is the net premium. In VLI, the net premium
is allocated by the policy owner, i.e. the purchasing entity, to
one or more separate accounts. Per this invention, a portion of
the assets in one or more of those separate accounts may be invested
in survival risk insurance on one or more of such insured lives.
As a result, the survival risk insurance provider will pay any survival
risk benefit to such separate account(s) if the insured(s) live
longer than expected.
[0039] In this funding strategy, the purchasing entity will be
the beneficiary and receive the death benefit of the VLI life insurance
policy if the insured dies while the policy is in force. Because
the purchasing entity is the owner of the VLI contract, the purchasing
entity is eligible to receive the policy assets invested in the
separate account. This funding strategy depends on death benefits
being paid from one or more of the VLI policies purchased by the
entity per a projected schedule of death benefits. If insured lives
live longer than expected at the time the funding strategy was initiated,
then the expected death benefit cash flows will not be realized
and the objectives of the funding strategy will not be met unless
a portion of assets in the separate account(s) were used to purchase
survival risk insurance.
[0040] The investment advisor for the VLI separate account, or
others for the benefit of the investment advisor, would analyze,
using the actuarial pricing methodologies described in the patents
or patent applications incorporated by reference herein, the present
value of future death benefits and an expected cash flow based on
assumptions consistent with the risk characteristics of the lives
insured for the policies owned by the purchasing entity. Such assumptions
would consist of mortality, interest, expense, persistency, future
premium payment requirements, and other assumptions as may be required
in order to determine a fair and reasonable present value for such
future death benefits.
[0041] Computer systems and programs would be used to apply such
calculations individually to each insurance contract which is owned
by the purchasing entity and, then, be summed in order to determine
a total present value for all such insurance contracts. Such calculations
may be done periodically in order to determine as of any given date
a present value and cash flows as they may change from time to time.
[0042] Computer systems and programs would also be used by the
investment advisor, or by others for the benefit of the investment
advisor, in order to establish risk profiles for the life insurance
policies on which survival risk insurance has been purchased by
the separate account. Such risk profiles will include, for example,
probabilities that the death benefit cash flows will develop as
expected by the assumptions used to develop the funding strategies
used by the purchasing entity and how likely it is that the projected
investment return will be realized. Such risk evaluation may involve
mathematically intensive stochastic processes in order to model
a multitude of equally likely cash flow scenarios (for example,
1,000). The distribution of possible results produced by the model
will be used to calculate the desired probabilities. Such stochastic
process is efficiently carried out only on a computer using a system
or program designed for such purpose.
[0043] In order to ameliorate the survival risk inherent in a purchasing
entity's funding strategy, investment advisors may choose to purchase
survival risk insurance on the lives insured by the purchasing entity
for the benefit of the separate account. Such survival risk insurance
will be purchased using a portion of the funds invested in the separate
account. A number of survival risk insurance structures are possible
as described in U.S. Pat. No. 6,999,935. One such structure would
have the separate purchase survival risk insurance such that the
survival risk insurance policy will pay a benefit to the separate
account if a life insured by a policy owned by the purchasing entity
survives a specified term which is at or near the term such life
was expected to survive when his or her policy was purchased. The
benefit paid by any such survival risk insurance policy will be
paid to the separate account and, thereby, become part of the policy
assets owned by the purchasing entity.
[0044] Through the purchase of survival risk insurance a separate
account investing in one or more survival risk insurance policies
can, for a premium or fee, transfer all or a portion of the survival
risk inherent in any funding strategy. Thereby, an investment return
or an expected funding result can be guaranteed or the probability
of actually receiving a projected return or achieving an expected
funding result can be significantly increased.
[0045] Another objective of the invention is to provide a way for
insurance companies to transfer the risk they may assume in making
guarantees to the policyowners to whom they have sold traditional
life insurance that death benefits will be paid according to a predetermined
schedule. Such schedule would be determined by using computer implemented
model calculations to project death benefit payments per a set of
assumptions, for example mortality and interest assumptions.
[0046] In this embodiment, the insurance company would purchase,
using assets in its General Account, survival risk insurance payable
to such General Account. The survival benefits paid under the terms
and conditions of such survival risk insurance policies would fully
or partially offset the payments made by the insurance company from
its General Account as a result of such death benefit guarantees.
BRIEF DESCRIPTION OF THE DRAWINGS
[0047] FIG. 1 is a diagram of an exemplary embodiment of the present
invention.
[0048] FIG. 2 is a diagram of an alternative exemplary embodiment
of the present invention.
DETAILED DESCRIPTION OF THE INVENTION
[0049] The following detailed description discloses various embodiments
and features of the invention. These embodiments and features are
meant to be exemplary and not limiting.
[0050] See FIG. 1 for a diagram of an exemplary embodiment of the
present invention. The exemplary embodiment of the present invention
comprises the following steps: [0051] 1. A purchasing entity 100
establishes a strategy for funding a program, such as a benefits
program. The program has a cash flow requirement. The purchasing
entity will rely on the timely payment of insurance policy death
benefits to at least partially meet said cash flow requirement.
[0052] 2. The purchasing entity will do calculations on a computer
to model the expected timing and amount of said insurance policy
death benefit payments under said funding strategy. The purchasing
entity will use results from said computer model to determine the
financial structure of said funding strategy, for example, the risks
associated with the payment of said life insurance policy death
benefits and the conditions under which the Survival Risk Insurance
benefits will be purchased and paid into the Separate Account. [0053]
3. The purchasing entity becomes a policyowner by purchasing a variable
life insurance (VLI) policy 120 from an insurer 110 on one or more
lives on whom the policyowner has an insurable interest (insured
lives). For example, the VLI policy issued 120 is on Life A. Said
VLI contracts will pay to the policyowner, the purchasing entity,
a death benefit if the insured life dies while the policy is in
force and provides a cash value which can be accessed by the policyowner
while the insured life is living. [0054] 4. The VLI policyowner
100 pays premiums to the insurance company 110 in order to keep
the VLI contract 120 in force. [0055] 5. The premium paid to the
insurer 110, net of any expense charges, is paid into the VLI contract
and the policyowner makes choices which allocate the net premiums
plus other assets to one or more Separate Accounts 130 established
by the insurer. [0056] 6. If the insured life dies while the VLI
insurance policy 120 is in force, the death proceeds are paid to
the policyowner 100, i.e. the purchasing entity. [0057] 7. Per the
terms, conditions, and management policy of the Separate Account
130 a portion of the Separate Account assets may be used by the
Separate Account 130 to purchase a Survival Risk Insurance Policy
150 with respect to one or more of said Variable Life Insurance
Policies 120. Said Survival Risk Insurance Policy 150 is provided
by a Survival Risk Insurance Provider 140. [0058] 8. The Separate
Account 130 pays a premium(s) to the Survival Risk Insurance Provider
140 for the Survival Risk Insurance (SRI) Policy 150 per the terms
and conditions of such contract. A condition of issuing such SRI
Policy 150 may be that the Survival Risk Insurance Provider 140
requires that the purchasing entity ensures the Survival Risk Insurance
Provider will receive the VLI insurance policy 120 death benefit
(or an amount equal to the survival risk benefit) following the
Survival Risk Insurance Provider's payment of the survival risk
insurance benefit. [0059] 9. The amount and structure of the SRI
benefit is determined by the Separate Account investment advisor
or insurance company based on risk analysis and modeling done by
them or on their behalf utilizing said sophisticated computer modeling
programs designed for that purpose. [0060] 10. The SRI policies
purchased may be based on various characteristics, such as one or
more of the following, in order to satisfy the risk transfer needs
of the investment advisor: [0061] a) Distinct Specified Periods
[0062] b) Varying amounts of Survival Risk Benefit [0063] c) Distinct
insured age groups [0064] d) Different sex [0065] e) Different smoker
status. [0066] 11. A survival risk insurance benefit is payable
to the Separate Account 130 purchasing the SRI policy 150 based
on the terms and conditions of the policy 150. Typically, the SRI
policy 150 will pay a benefit if the insured life survives a specified
period of time.
[0067] When the SRI benefits are paid into the Separate Account
130 which purchased the SRI policy 150 they are received as investment
income and become part of the cash value of the variable life insurance
policy 120.
[0068] See FIG. 2 for a diagram of an alternative exemplary embodiment
of the invention. The alternative exemplary embodiment of the present
invention comprises the following steps: [0069] 1. A purchasing
entity 200 establishes a strategy for funding a program, such as
a benefits program. The program has a cash flow requirement. The
purchasing entity will rely on the timely payment of insurance policy
death benefits to at least partially meet said cash flow requirement.
[0070] 2. The purchasing entity will do calculations on a computer
to model the expected timing and amount of said insurance policy
death benefit payments under said funding strategy. The purchasing
entity will use results from said computer model to determine the
financial structure of said funding strategy, for example, the risks
associated with the payment of said life insurance policy death
benefits and the conditions under which the Survival Risk Insurance
benefits will be purchased and paid into the General Account. [0071]
3. The purchasing entity, becomes a policyowner by purchasing a
life insurance policy 220 from an insurer 210 on one or more lives
on whom the policyowner has an insurable interest (insured lives).
For example, the life insurance policy issued 220 is on Life A.
Said life insurance policy contracts will pay to the policyowner,
the purchasing entity, a death benefit if the insured life dies
while the policy is in force and provides a cash value which can
be accessed by the policyowner while the insured life is living.
[0072] 4. The life insurance policyowner 200 pays premiums to the
insurance company 210 in order to keep the life insurance contract
220 in force. [0073] 5. The premium paid to the insurer 210, net
of any expense charges, is paid into the General Account 221 of
the life insurance company. [0074] 6. If the insured life dies while
the life insurance policy 220 is in force, the death proceeds are
paid to the policyowner 200, i.e. the purchasing entity. [0075]
7. Per the terms, conditions, and management policy of the General
Account 221 a portion of the General Account assets may be used
to purchase a Survival Risk Insurance Policy 240 with respect to
one or more of said Variable Life Insurance Policies 220. Said Survival
Risk Insurance Policy 240 is provided by a Survival Risk Insurance
Provider 230. [0076] 8. The General Account 221 pays a premium(s)
to the Survival Risk Insurance Provider 230 for the Survival Risk
Insurance (SRI) Policy 240 per the terms and conditions of such
contract. A condition of issuing such SRI Policy 240 may be that
the Survival Risk Insurance Provider 230 requires that the purchasing
entity ensures the Survival Risk Insurance Provider will receive
the life insurance policy 220 death benefit (or an amount equal
to the survival risk benefit) following the Survival Risk Insurance
Provider's payment of the survival risk insurance benefit. [0077]
9. The amount and structure of the SRI benefit is determined by
the General Account investment advisor or insurance company based
on risk analysis and modeling done by them or on their behalf utilizing
sophisticated computer modeling programs designed for that purpose.
[0078] 10. The SRI policies purchased may be based on various characteristics,
such as one or more of the following, in order to satisfy the risk
transfer needs of the investment advisor: [0079] a) Distinct Specified
Periods [0080] b) Varying amounts of Survival Risk Benefit [0081]
c) Distinct insured age groups [0082] d) Different sex [0083] e)
Different smoker status. [0084] 11. A survival risk insurance benefit
is payable to the General Account 221 purchasing the SRI policy
240 based on the terms and conditions of the policy 240. Typically,
the SRI policy 240 will pay a benefit if the insured life survives
a specified period of time.
[0085] When the SRI benefits are paid into the General Account
221 which purchased the SRI policy 240 they are received as investment
income and become part of the cash value of the life insurance policy
220.
[0086] The terms and conditions of the life insurance policy 220
will be designed, as is typical for VLI policies issued in the insurance
industry, such that the VLI policy qualifies as life insurance under
US Internal Revenue Code section 7702 or other appropriate code
in a given jurisdiction.
CONCLUSION
[0087] One of skill in the art will recognize that insurance is
a regulated industry. One practicing the methods described and claimed
herein will want to maintain compliance with all applicable local,
state and federal regulations, to ensure that the insurance policy
is properly presented to the insured, premiums are properly approved,
underwriting properly occurs, all necessary regulatory approvals
are in place, etc.
[0088] While particular embodiments of the present invention have
been illustrated and described, it would be obvious to those skilled
in the art that various other changes and modifications can be made
without departing from the spirit and scope of the invention. Any
of the aspects of the present invention found to offer advantages
over the state of the art may be used separately or in any suitable
combination to achieve some or all of the benefits of the invention
disclosed herein. |