July 6, 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.

Questions on Senior Life

            As so many readers had questions about the article two weeks ago on "A Major Opportunity in Life Insurance for Seniors," (see http://www.greenwichfinancial.com/wm68.htm ) -there was a groundswell of interest-here are some answers.

           You gave an example of a $10 million policy.  Can this program work for a smaller amount?  Yes.  The smallest policy that is available under this program would be $1 million.  For example, suppose a widow has a net worth of about $1.5 million, consisting of the value of her house and some investments.  She is eighty years old.  She is in relatively good health, but she has high blood pressure, which is under control with medication.  Suppose that a $1 million policy would otherwise cost her life insurance premiums of $150,000 per year under a universal life insurance policy risk-rated "standard" by a major insurer.  Let us suppose she enters into a program for non-recourse premium financing for two years, with a renewal option for two years, and she names her two children as equal beneficiaries. Her legal consideration under the contract would be a one time, up front payment of only 0.5% of the total premiums due under the program, which would equal $1,500; this would be her total money at risk.  In return, she would receive life insurance coverage for two years, which would otherwise have cost her $300,000 (!). 
            If the widow were to die during the first two years, her beneficiaries would each receive $750,000, minus the cost of extinguishing the loan.  On the other hand, suppose, more happily, that she lives, although her health has perhaps deteriorated somewhat.  She would have four choices.  The most attractive is typically to ask the life settlement company to sell her life insurance policy in the secondary market.  In a case such as this, net proceeds to her of $100,000 to $200,000 would be typical. However, if there is no profitable sale to investors available, there is a second choice: the widow can simply assign her policy to the lender/servicer, and the loan would be extinguished.  Although there was no profit from sale, there was a net benefit of about $298,500 from the low cost life insurance she enjoyed for two years.  Third, the widow has the option to repay the loan and continue the insurance program without financing.  Finally, the widow could choose to extend the program for another two years, after which she would once again have the first three choices.

           Who is most likely to be eligible for this life insurance program for seniors? Only those with a minimum age of 70 and a maximum age of 90 are eligible at this time.  The likelihood of acceptance actually increases with increasing age, as long as the applicant is insurable at a reasonable rate.  Not everyone is insurable, but insurance companies understand that older people on average have a variety of ailments.  Most males will have an enlarged prostate.  Many people will have some circulatory problems.  On the other hand, someone suffering from terminal cancer, or an emphysemic rolling around an oxygen tank, would not be insurable.

            What am I giving up in return for these benefits?  Isn't this program too good to be true? This is a common apprehension, and it's an intelligent question to ask.   There are two parts to the answer.  First, as indicated in our first article, this program will probably not last too long under the terms described, as it is attracting substantial interest, and the market will respond by raising its price over time.  For example, the cost of insurance for seniors may tend to rise, or risk ratings may tend to become more severe.  So this is a case where the early birds will get the worm, or, at least, the juiciest worm.  Second, there is something valuable that you are giving up, namely, your "insurance capacity."  You can only insure your life up to about 80% of your net worth, minus outstanding insurance on your life.  If you carry out this program to the maximum degree, it would exhaust your ability to take out additional insurance on your life.  On the other hand, most people never recognize the value of their unused insurance capacity and are doing nothing with it.  They let this potential asset lie fallow.  In fact, only a small minority of people will have ever given it a thought. Then too, if you are a senior, the annual cost of obtaining new life insurance outside of this program is so terribly high, in terms of annual premiums, that most seniors would not consider taking it on.  A final point: while asking smart questions, don't outsmart yourself, leaving others to reap rewards that you could have pursued.  There is the story of the economics professor who wouldn't pick up a twenty dollar bill from the sidewalk because he figured that if it were really there, someone else would already have picked it up.

           If I enter this program, should I consider this a way of benefiting my family or benefiting myself?  You should think of it both ways.  Like all life insurance, if you should die, it provides an income tax free death benefit to your beneficiaries, which may be your spouse, your dependents, friends, a charitable cause or personal foundation, or some combination.  But this is one of the only cases where some of the greatest benefit may occur if you continue to live .  Very large profits are possible from the sale of your life insurance after the end of the non-recourse financing period.  Although a profit is not guaranteed, what is assured is that no matter what happens, you can walk away without any personal obligation under the loan simply by assigning your policy at the end of the financing term.  As attorney Larry Brody commented to the Wall Street Journal ("Letting an Investor Bet on When You'll Die," May 26, 2005 issue), "From the insured's point of view, there are very few risks, if it's clear you have a real choice at the end." 

           Isn't it creepy that the investors who might ultimately buy my policy (if I should decide to seek a profit in this way) would be betting on my lesser lifespan, whereas traditional life insurers benefit from my living the longest possible time?  What if one of these investors tried to blow me away?  Something sinister like that could perhaps be imagined if the investors were shady individuals looking to benefit from your early demise.  It would have the makings of a thriller, perhaps, like Billy Wilder's "Double Indemnity" movie.  In fact, the investors we are talking about are huge institutional investors in Europe and the United States.  They have no direct contact with any insured person; they would ultimately get notice of your death from your appointed advisors.  Although the life insurance policy you take out, say for $2 million, may seem huge to you, it's a drop in the bucket for them, a number that is pooled with the lives of countless others, however impersonal that may sound.  Such is capitalism.

           Is this program legal?  Why are some insurance companies trying to restrict their appointed agents from making applications under such programs?  There is certainly nothing illegal, or unethical, about non-recourse premium financing of life insurance.  In my opinion, if you're potentially eligible, as to age and health status, you'd be foolish not to try to qualify. Certain insurance companies, including, for example, Lincoln National, have moved to stop their agents from making any life insurance application under such programs.   However, there are other insurance companies that welcome the business.  When an insurance company shuns senior life business under this program, it may imply that they are not fully confident in their own underwriting judgment or in the integrity or scruples of their own agents to make honest applications.  Keep in mind too that under this program, lapse or surrender of insurance will be quite uncommon, and insurance companies-though they don't of courses highlight this fact-often benefit very much when older people cannot afford to continue their life insurance and let it lapse.  

 

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.