September 13, 2005 Copyright © 2005, Greenwich Financial Management Inc., a registered investment advisor. Securities offered exclusively through Purshe Kaplan Sterling Investments of 18 Corporate Woods Blvd., Albany, NY 12211, Member NASD/SIPC.

A Major Opportunity In Life Insurance for Seniors

There is currently a major opportunity in life insurance for seniors.  It's called "non-recourse premium financing." 

It can provide, for eligible insured persons, very large face values of life insurance with virtually no premium cash outlay for periods of two to four years, while retaining potentially enormous equity upside for the insured person.  This opportunity is real, but it will probably not last very long, at least on present terms.  If you have reached a minimum age of seventy, up to about 90 years old, or if you have parents or loved ones in this age bracket, and who have a net worth of at least about one and a half million dollars (including real estate, business, etc.), this article will repay your timely attention.  Here's a case where age is an advantage!

To explain this opportunity, I need to review some basics.  Stay with me on this.

The amount of insurance a person can apply for is not infinite; it is limited to about 80% of the insured person's net worth.  So, for example, with a net worth of $5,000,000, you could obtain life insurance of about $4,000,000 (minus insurance already in force).  The life insurance that you can apply for, based on your wealth, is called your "insurance capacity."   Most well-to-do people have substantial unused insurance capacity, a potentially lucrative sleeping asset.

When you apply for life insurance, the insurer will "underwrite" your case.  Not everybody is "insurable"-but you'd be surprised how many are, including, often, cases of early stage cancer, heart disease, Parkinsonism, etc.

The opportunity for seniors has developed in part because an institutional investor market has developed in pools of insurance policies on individual lives.  These investors seek to make an income by investing monies now that will be repaid, with what amounts to interest, months, years or decades later, when individual insured persons die.  Among known investors are insurance giants Berkshire Hathaway and AIG.

Here's an example of how to exploit the opportunity I spoke of.  Let's take the case of a man-let's call him Roger-seventy years of age, with excess insurance capacity of $12 million, who wishes to apply for $10 million of life insurance and to finance the premium non-recourse.

>Roger (or his advisor, attorney, or accountant) approaches a consultant in this area and ask about the possibility of obtaining a life insurance policy backed by "non-recourse premium financing."  The consultant asks him to fill out a medical information release waiver, a HIPAA (federal privacy law) form and and a written health questionnaire.  The consultant will ask a specialized lender/servicer to consider if the case has a high probability of success.  The probability of acceptance actually grows higher as the age goes above 70. 

>If Roger is accepted as a candidate by the lender/servicer, he will then be asked to undergo a more thorough underwriting that includes a physical examination.  The lender/servicer will contact a number of high quality insurers, attempting to gain the best possible premium rate on behalf of the client.  If a good match is found with an insurer, the lender/servicer will invite Roger to form two contracts.  Roger will sign an insurance contract with a life insurer-whose firm offer has been obtained--and he will also sign a financing contract.  The financing terms available run from two to four years at present.

>Let's say the best annual premium for a permanent life policy for Roger is $500,000 per year, and he agrees to financing for four years.  Roger will only be asked to put up, as "legal consideration," ½ of 1% of the total amount financed, which would equal $10,000 in this case.   This will be Roger's entire investment.  The only collateral for the loan is the new life insurance policy; there is no personal guarantee.  (A typical effective interest rate, including all charges, is in the mid-teens (fixed), reflecting the risk nature of the collateral.)

Suppose that Roger, unfortunately, dies during the third year of the insurance contract.  His beneficiary-possibly his wife, his children, a charity or foundation, or some combination-will receive the entire death benefit of $10 million, minus financing charges.  Like all insurance death benefits, it will be income tax free.  If it were properly assigned to an irrevocable trust, it can also be estate tax free. 

But suppose, happily, that Roger lives out the four year term of his financing.  He then has three options:

1.  He can pay off the interest charges, close out the borrowing, and continue the life insurance contract on his own.

2.  He can ask the consultant to seek a bid in the secondary market for the life policy.  (There will usually be a brokerage charge for such a transaction.)   Let's say that a very good bid is found and Roger accepts it.  The policy would be assigned to that investor (who is walled off from personal contact with the insured).   A pre-tax  profit in a case of Roger's size and type, after repaying all charges, would frequently be hundreds of thousands of dollars.  If Roger's health status had declined materially during the insured period, an even higher profit, in the millions, is possible.

3.  If a profitable bid cannot be found for the policy, the insured can allow his policy to be assigned; in return, the servicing agent extinguishes the loan.  Nothing ventured but $10,000, but something was gained: four years of a large life insurance policy that otherwise would have cost $2 million in premiums over the period of coverage.

It is rare in finance to see such disproportionate rewards in relation to risk.  It's not that this is too good to be true; rather, it's too good to be true for long on the present favorable terms.  Several insurance companies, including Lincoln National, have acted to stop their agents from making such applications on behalf of clients.  Therefore, if your insurance agent is a "captive" of one of these companies, you will not have heard about this opportunity. 

If you are age-eligible, and if you have excess insurance capacity, it's almost careless (financially speaking) not to investigate if you can qualify for this program.  I am discussing the formation of a business relationship with one of the leading lender/servicers, a pioneer in this field, as I believe demand for this product will grow quickly.  I would be glad to provide guidance to interested individuals and families, as well as to advisors, insurance agents, attorneys and accountants.

 

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.