Free Life Insurance- what is the actuarial perspective?

[melmunch]

There has been a lot of buzz lately amongst those who sell senior insurance products, about some new zero premium life insurance program. The claim is, a bank will fund the full premium for a 50k life policy, with the bank receiving 35k as repayment, and the beneficiary receiving the remaining 15k as payment for their "insurability"

I know that life insurance arbitrage, and premium financing are nothing new, but in this case, they say that the insurance company is in on it. I am not an actuary, but I just dont see how the numbers can work out. I would appreciate some responses from actuaries who understand the numbers that are involved.

Basically, it seems that there is a life insurance company that is willing to issue policies which they know will have 100% persistancy and no lapse rate, yet they still need to make money. Also involved is a bank that will pay the premiums, and will also make money. On top of all that, the agent who sells it, the marketing company that recruits them, and the organizer of the strategy will all take a cut.

Is this possible?

[JMO Fan]

Originally Posted by melmunch

There has been a lot of buzz lately amongst those who sell senior insurance products, about some new zero premium life insurance program. The claim is, a bank will fund the full premium for a 50k life policy, with the bank receiving 35k as repayment, and the beneficiary receiving the remaining 15k as payment for their "insurability"

I know that life insurance arbitrage, and premium financing are nothing new, but in this case, they say that the insurance company is in on it. I am not an actuary, but I just dont see how the numbers can work out. I would appreciate some responses from actuaries who understand the numbers that are involved.

Basically, it seems that there is a life insurance company that is willing to issue policies which they know will have 100% persistancy and no lapse rate, yet they still need to make money. Also involved is a bank that will pay the premiums, and will also make money. On top of all that, the agent who sells it, the marketing company that recruits them, and the organizer of the strategy will all take a cut.

Is this possible?

Bank sells the insurance, gets a 70% commission. Bank pays the premium, puts insurance on books as asset, gets benefit of any cash value increases tax-free. When you die, bank gets 35k tax-free death benefit; IRS loses.

Check this out:

Walking Small

The Emperor Has No Clothes, as the Life Industry
Cartel proves, it’s always…always about the money

By Lawrence B. Patterson

“When people lost sight of the way to live, came codes of love and honesty. Learning came, charity came… hypocrisy took charge.” — Author unknown
In April 2005, The Life Settlement Institute released statistics indicating life settlements leveraged life insurance policy owners more than $1 billion over cash surrender for their policies through the secondary market.

According to the Bernstein Research report, June 2005, the life settlement market’s grown from the mid-1990s to around $13 billion today. Bernstein projects a high growth outlook of over $160 Billion over the next several years.

HOW? THE NUMBER OF SENIORS AGE 65+ WILL MORE THAN DOUBLE IN THE NEXT 23 YEARS. By 2030, one in every five Americans will be 65. Life settlements will continue to be significant financial instruments as aging baby boomers look for additional flexibility in retirement planning and asset positioning.

Elimination or reduction of estate tax liabilities will create a glut of survivorship policies possibly double what they might need to be to cover estate taxes. These will be prime additional inventory for the secondary market.

Although there were signs of recovery in 2005, life insurers suffered a steep decline in gross investment returns over the last five years according to a recent study by Conning Research. Overall, gross investment income returns on investable assets for the period 2001 to 2005 dropped from 7.10% in 2001 to 5.93% in 2004, before increasing to 6.02% in 2005. That’s only a mere .09% recovery…still leaving a 1.08% deficit gap from the prior four periods.

BOND, GROWTH BOND: Bonds were one of only two (out of six) asset classes that grew both in amount and as a percent of total assets over the study period. Maybe they should take some of their own advice and diversify into Equity Indexed Annuities!

Recently, Bruce Ferguson with the American Council of Life Insurers spoke with Eleanor Barrett with BestDay Audio Spotlight.

When asked about the viatical settlement model, he responded that the NAIC A Committee, “Put together and adopted a very aggressive proposal that’s designed to put an end to so-called, stranger-originated life insurance transactions, something that we think is just not good public policy and violates the spirit of insurable interest laws. So we’re very pleased with what the regulators drafted.

“I do expect, even though it’s not a final NAIC model, for there to be consideration of the A Committee proposal in many states next year. First, we think it’s good public policy. We’d like to see it enacted, and we’re already taking steps to get it introduced in a number of states.”

For the first time, STOLI is referred to as “so-called,” not as an absolute
Now the contention is that STOLI (and presumably also SOLI)…ergo premium financed life insurance policies for seniors age 65+ violates the “spirit” of insurable interest laws, and that the ACLI thinks it is just not good public policy
In my opinion, that’s pretty arrogant, considering: “STOLI, SOLI”, and third party premium financed life insurance either violates the insurable interest laws, or it doesn’t. It’s like being a little pregnant.

It doesn’t. The policy owner, often simultaneously the insured, executes their OWN policy purchase. By virtue of that execution, they are absolutely acting within the realm of insurable interest. The third party funder is merely providing the arbitrage.

Now they presume jurisprudence and I believe a conclusion of law; pre-enactment of ex post facto amendments and consequent legislation.

IT IS IRRELEVANT that the third party funder may or may have not conscripted the policy owner into deciding to do the premium financing. HELLO: it is called free enterprise. I believe anyone demonstrating the hubris to intervene in any contractual agreements between a third party funder and a policy holder would be tortuous interference with a business relationship. IT IS NO ONE ELSE’S BUSINESS: beginning with the questions now very coyly appearing on some life insurance policy applications as discovery.

Then, IF the policy owner exercises their rights by virtue of Grigsby v. Russell to assign the policy through sale, they are transferring personal property through that sale. I further believe any timeline moratoriums in policy assignment beyond the two year contestability would be restriction of trade, unfair trade practices, and adverse selection by class.

How many times must this be pointed out to the ACLI, et al.?

The answer is: they don’t care. Apparently they are going to force feed this down our throats…customer be damned.

Not on MY watch. In my opinion, not on anyone else’s who has any sense of fiduciary responsibility, either.

What if a prospective client is smart enough to figure out that he can create and leverage arbitrage through premium financing and dump his policy in two years on the secondary market when the contestability period expires…should he qualify; yet be covered for the full death benefit should he pass in the interim?

I thought that was called financial planning. Actually it is stunningly brilliant financial strategy. Given the rate of inflation, combined with the U. S. dollar exponentially devaluating, the OPM arbitrage of obtaining a sizeable death benefit then exiting that asset position with a cool gross profit of 163.64% (hypothetical example below) blows away most other performances.

Hypothetical Example

The following hypothetical illustrates possible outcomes. (Assumptions were detailed in a previous article).

If the policy owner decides to keep the policy, the funder has still made 14 points on their money: also a non-predatory superior yield.

As recently as February, 2006, “The ACLI testified in favor of the NAIC Model in state legislative hearings. Why has the ACLI now walked away from a popular Model Act when it otherwise claims to be for regulatory consistency?

Look at the ACLI's agenda. It revolves around embarrassing the states in front of Congress and pushing for a federal charter. (1)

I believe the NAIC A Committee’s Viatical Settlements Model Act “serves as a Trojan horse” for the ACLI’s ultimate goal of simultaneously attempting to bury the Viatical Settlements Model Regulation, one piece at a time.

One might imagine hearing Mona Demarkov (Romeo Is Bleeding,1993) talking about the secondary market, saying, "I don't want you to kill it -- I just want you to bury it. If it dies in the process, that's their problem".

“Life insurance carriers have opposed the growth of the secondary market from day one. Policy owners have been paid billions more than their insurers' cash surrender offers by secondary market providers in less than a decade. Carriers would prefer that these policies instead lapse and that consumers receive little or no return for the premiums they pay - even though the policies are marketed as investments.

That's the reason the ACLI is opposing proven consumer protection bills by raising unrelated, irrelevant issues. Their goal is to divert attention from their monopolistic, undervalued lapse and cash surrender practices. The NAIC President called this a "protectionist" tactic in 2004”. (1)

Everyone seems to have forgotten why we all are doing what we do: to ensure the client comes first. To give customer focused sales and service within the best and brightest suitability of advice.

Who among us is wise enough to speak for the client? Let them tell us what they want after carefully understanding and considering ALL their available options.

“In the Constitution, equality was not equated with justice. The framers believed that justice exists when all interactions among people are based on voluntary exchange. To them, it was the process of interactions, not the outcomes, which mattered. Today, however, a new idea of justice (often called social justice) equates justice with equality.

This view is used to call for a process of enforced equalization and to make envy an acceptable emotion. Under this new concept of justice, an individual is free to exercise his rights as long as such exercise does not violate state-created superior or equal rights of others or the common good as defined by the state.

The notion of social justice is used to foster social reform through state intervention and economic planning, devices which require the sacrifice of the moral ideas of individual freedom, individual responsibility, and voluntary cooperation…True justice is attained when people’s lives and property are secure and they are free to own property, order its direction, determine the purpose to which their bodies are put, engage in consensual transactions and relationships with others, and freely pursue their conception of happiness”. (2)

In my opinion, I believe what this is really all about is avarice. And THAT, boys and girls, is just never good public policy. Ask Jeffrey Skilling.

There are two kinds of truth: The truth you can read in a book, and the truth any fool can see. “If you eliminate the impossible, whatever remains—however improbable—must be the truth”.

http://insurancenewsnet.com/article....op_lh&id=79030

[kryptodobe]

Does any one feel the Zero Premium Life product will launch?

[Gloria Wolk]

This is not an actuarial answer but one based on studying the viatical & life settlements industry for years. Life insurers who encourage "zero premium" (also known as free life insurance; premium financed life insurance; stoli/ioli) will profit when the companies that sell these policies to investors cannot pay premiums. Then the policies lapse, and the insurer keeps all the premiums but does not have to pay death benefits.

There have been so many instances of this happening that it is a likely assumption. Additionally, if a person of 83 years is issued a policy with a death benefit of $1 million, the insurer has done thorough medical underwriting. Statistically, this person is not likely to die for another ten or fifteen years. But the policy may be sold to investors with false medical reports ("dirty-sheeting"). If investors are told they must start paying premiums because the company ran out of funds to cover these, investors may balk. Then the policy is certain to lapse.

BTW, financed life insurance is not available for death benefits as low as $50K. It is limited to insureds who ostensibly have high net worth, who apply for at least $1 million death benefit. Premiums, then, are astronomical. Multiply the annual premium by five years and 100 or 1000 insureds and you can see the profit potential.

Note: The phrase "ostensibly have high net worth" is intentional. I have documents that show a number of middle class seniors who applied for these types of policies with the intent of immediately selling to investors. One example: a retired bus driver.

Gloria Wolk MSW
consumer advocate, author, consultant
http://www.Viatical-Expert.net

[Morningsuccess]

Life insurance companies were really hot on this 1-3 years ago because they made big money writing policies they normally wouldn't get, but now there are two primary concerns. The first is an ethical issue with "stranger owned life insurance" or "investor owned life insurance" as its called since a disinterested party in your father in law's life will profit substantially at his death.

[HelloUThere]

This is a little late but I thought I would put in my 2 cents. I am only a student and do not work in the life insurance field, but here is what I would guess the issue with STOLI is:

In order to price products (especially products with tail end benefits), actuaries make assumptions about policyholder behavior, including lapsation. An investor is less likely to let a policy lapse, because they wish at least some return on investment. Not knowing who the true purchaser of the policy is could cause the mispricing of the product.

People looking at STOLI should be very careful.
1. Many states have indicated that they consider STOLI a violation of their insurable interest laws.
2. The IRS alrady have laws regarding the CV of the contract and the policies tax qualified status. I would guess this wasbe to prevent the excessive use of life insurance to avoid taxes. Who is to say that they wont to the same to STOLI leaving everyone holding a contract subject to taxes on the benefits.
3. STOLI could cause life insurance rates down a death spiral similar to what we have seen in LTC making it not worth the costs.