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For
life agents whose clients have been involved in
non-recourse premium financing deals in the past
few years, a day of reckoning has arrived and it
could provide a windfall for savvy agents and
their clients.
Anyone
in the life insurance business has heard about
the many elderly who have been offered the
opportunity to "buy" a life insurance
policy without paying any premiums. The
premiums are paid with non-recourse
financing. That means the insured cannot
be forced to pay-off the loan, and some takers
were even paid up-front money to play the
game. In the typical deal the insured was
told he had the option to pay-off the loan
during the first two years or would receive
money when the policy was sold after two
years. Most takers just signed the stack
of papers put in front of them without paying
much attention to exactly what happens after two
years.
There
have been a rash of these deals in Florida, and
elsewhere, because insurance companies routinely
under-price policies to very elderly customers
(from a strictly actuarial perspective) knowing
that most of them let the policies lapse before
they die. The companies can afford the
lower the premiums and still do very well, on
average, since no death benefits are ever paid
on the many cancelled policies. The
distortion in pricing provides an opening
for investors who realize, after calculating the
life expectancy of an elderly insured, that the
eventual death benefit is much greater than the
cost of paying premiums until the insured is
likely to dis. Policies of interest are
usually in multiples of millions. A five
million dollar policy often yields a profit of
several hundred thousand dollars after two
years, even after paying off the loan for the
premiums and interest on the loan.
The
question is, who gets that profit? Article
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