December 18, 2006. Copyright © 2006, Greenwich Financial Management Inc., a registered investment advisor. 

Life Insurance “Bonanza” for Seniors? 

            A front page article in this Sunday’s New York Times, titled “Late in Life, Finding a Bonanza in Life Insurance,” discusses how some seniors are profitably leveraging their life insurance policies.  NY Times Citation

           

            Powerful investors-- including hedge funds, investment banks such as Deutsche Bank and Credit Suisse, and billionaire Warren Buffett--have been buying pools of life insurance policies on older people.  As a result of this demand, some life policies command a price in the market that is higher than their “cash value,” which is what the policy is worth if surrendered to an insurance company prior to death. 

 

In this new environment, it behooves any senior who is considering abandonment or surrender of a life insurance policy to discover its alternate value in the secondary market.  Arguably, fiduciaries advising seniors now also have a duty to inform seniors of such opportunities, if surrender of a life insurance policy is under review.

 

In some cases, seniors have acquired new insurance, either with their own funds or funds borrowed against the policy, bearing in mind the option to sell a portion of their insurance while still alive.  Normally, a sale if any would take place no sooner than two years after issuance of the policy, at which time the so-called “contestability” period expires.   

 

The article cites Marvin Margolis, an 80 year old Manhattan financial consultant, who two years ago took out a policy on his own life with a death benefit of $7 million and required annual premiums of $400,000.  Margolis borrowed the money to pay the premiums and deferred the interest until loan maturity.   He has the right to repay the loan and continue the policy, but instead is he is now arranging to sell his policy for approximately $2 million, from which he will repay his loan of $800,000 plus interest; there will be a pre-tax gain of approximately $1 million.  Margolis, according to the report, is thrilled.

 

Premium financing transactions should only be considered by affluent individuals, with a net worth of at least one million dollars.  Further, not everyone is insurable, let alone a suitable candidate.   See “A Major Opportunity in Life Insurance for Seniors,” Article by Andrew Szabo (June, 2005).   I have advised on several dozen of these transactions, with death benefits as high as $50 million, mostly in co-operation with other insurance agents.

 

Pure “non-recourse financing” for life insurance--defined as without any personal guarantee by the insured person--has become more difficult to access, though such deals still get done.  Many insurance companies, wary of the new secondary market, insist that each borrower must carry some risk.  However, a significantly lower interest rate is available to the borrower who provides financial collateral or a personal guarantee for the loan.  At this time, a collateralized premium financing may carry an adjustable interest rate of perhaps Prime minus 1.75% (6.50% currently), while a non-recourse uncollateralized loan, when available, may be priced 5% to 10% higher.  

Andy Szabo, CFA, is Managing Director of Greenwich Financial Management Inc., a Registered Investment Advisor, which advises individuals and companies on investments, insurance and employee benefits.  Questions or comments welcome by phone at 203-531-2877 or e-mail: Szabo@GreenwichFinancial.com.