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Use life settlements to lower financial risks
By Valerie Greenberg
Guest Columnist
Many older Americans are deciding to cash in their insurance policies by selling them to companies that then use the money to complete projects with minimized risk.
A market exists for life insurance policies of healthy insured individuals over the age of 65.
Many senior citizen policyholders have found the insurance they purchased years earlier was no longer needed for the reasons it was purchased. Instead of lapsing or surrendering the policy, they sold it.
The insured received more cash for the policy than if they had surrendered it or allowed it to lapse.
The purchasing company obtained an asset at a desirable price. This asset is a life insurance policy on a senior citizen who has a predictable life expectancy. This is the key factor.
Life settlements are purchased policies of senior citizens subject to actuarial tables, which have a high degree of certainty in determining life expectancy.
The high degree of certainty of life expectancy adds to the certainty of mortality itself.
This coupled with the persistency of the insurance industry establishes life insurance as an asset with a predictable stable value.
Collateral/growth
Purchased life insurance policies are being packaged into pools or portfolios. These pools are the newest tool to be introduced as a growth or collateral instrument.
These instruments can be used to stand behind large financial transactions. Projects can range from business expansion, real estate development, construction, rehab, merger/acquisition, pension growth or investments.
This financial instrument differs from other investment and collateral instruments in that there is no market fluctuation to affect yield.
The lender or investor has not only the business or real estate collateral, but also a pool of life insurance policies with the lender or investor as beneficiary.
Risk minimization
When there is a need for a specific size loan, a pool of policies is created and customized to fill that need. The pool is formed using the law of large numbers, which means using the most number of policies possible within the pool. This allows for more actuarial certainty.
With the blend of policies in the pool, it can be actuarially proven what percentage of policies will mature each year. The death benefits from the matured policies go toward paying down the principal continually over the term of the loan/investment.
Each and every policy selected undergoes rigorous legal and medical underwriting criteria to positively categorize its admission into the pool. All policies are from A or better rated American life insurance carriers and all are past the contestability period.
An additional factor that lowers risk is the use of a nationally listed trust bank as managing agent for the pool of policies and distribution of benefits.
Other risk management tools are a proven tracking system to know when an insured passes on, a predetermined percentage of performance insurance to cover any shortfall of policies that have not matured at the end of the loan period and an adequate premium reserve to keep the policies in force.
While the collateral minimizes risk and provides a certainty to the lender/investor, the project must still stand on its own merit and have cash flow available to pay interest or dividend exposure.
Project uses
Projects this financial ideology is being applied toward include:
• Purchase and conversion of an existing building for condominium/retail space usage.
• The purchase of companies by a financial holding company, creating a conglomerate.
• Expansion of a computer software company.
• Expansion of a high tech medical equipment company.
• Expansion of an automobile warranty company.
• Purchase and rehab of a manufacturing facility.
• A church pension fund seeking superior growth.
The size of the project can vary from a minimum of $10 million.
Exposure
The cost of the project, including collateral costs, will certainly increase the lending/investment amount. The justification for this increased financial exposure is two-fold.
First, the protection to the lender/investor is guaranteed by more than 100 years of actuarial science, and secondly, the financial strain on the project at hand is minimized, creating a much healthier atmosphere to promote success.
The lender/investor risk is interest or dividend exposure. A careful analysis of the project to be financed, along with a withholding or prepaying interest for a specified period until project cash flow can support it, is often recommended.
A comparison to pure lending or investing will quickly point out the safety measures employed by this strategy.
The creation of this program is aimed at promoting a healthy market for investors, lenders and entrepreneurs. For the first time, all parties entering a financial transaction can be assured that the principal is completely protected.
Valerie Greenberg is the owner of Valerie Greenberg and Associates. E-mail her at valgreenberg@hotmail.com.
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