LIFE INSURANCE
Cash value life insurance on the
life of a Florida debtor is exempt from creditors. Non-recourse
life insurance is a creative financial which incorporates life
insurance policies financed by third party investors whereby
the insured benefits from cost-free, risk-free life insurance
with the added opportunity to profit financially during the
insured’s lifetime.
A key element of most life insurance contracts is the contest
period during which a life insurance company may challenge a
policy application and refuse to pay death benefits in the event
of the insured’s death. Most policies have a two-year
contest period. Two years after issuance of a policy the death
benefit “vests” so that benefits must be paid upon
the insured’s death regardless of mistakes or misrepresentations
about the insured’s health on the insurance application.
There are private or institutional investors who will place
money up front for the insured’s purchase of a life insurance
policy with the expectation of the policies appreciated value
following the two year contest period. These investors will
advance initial premiums on a condition of repayment, with interest,
at the end of the contest period or upon the insured’s
death within the first two years.
Other investors, primarily institutions, find financial opportunity
in purchasing large, vested insurance policies at the end of
the contest period. A large, two-year old life insurance policy
has value to third-party institutional investors especially
when the insured’s life expectancy is relatively short
by virtue of age or health. These institutional investors purchase
for cash select vested life policies with the expectation of
receiving death benefits in a relatively short time frame. The
purchase and sale price is set at a discount of the full death
benefit depending upon the insured’s age and health and
other financial considerations.
Combining an eligible insured, an investor willing to speculate
on the policy purchase, and institutions in the market for vested
insurance policies creates an unique opportunity for cash-free
investment in a creditor protected financial vehicle known as
“non-recourse life insurance.” The benefits and
options in non-recourse life insurance change during the term
of a policy. At the outset, an investor lends money to a life
insurance trust created by the insured for initial premium payments.
If the debtor/insured dies within the initial two year contest
period the investor is repaid his investment loan, plus interest,
from the death benefit, and the balance of death benefits are
paid through the insurance trust to the trust beneficiaries.
At the end of the initial contest period the debtor has the
option of selling the policy to a different institutional investor
or repaying the initial premium lender and walking away from
the transaction. In that case, debtor has enjoyed free life
insurance coverage for the preceding two years. The debtor/insured
also has the option to repay the initial investor with his own
funds and take over future premium payments through the insurance
trust.
A more profitable option for the debtor/insured at the end of
the two-year contest period is to sell the policy to an institutional
investor. Two years into the policy, the death benefit is vested
and the debtor’s life expectancy is at least two years
less than it was upon policy issuance. If the insured’s
health has deteriorated during the two-year contest period the
value of the policy is even greater. In any event, the now-vested
life insurance policy has enhanced value which the debtor/insured
can realize through a sale of the policy to financial institutions.
If the vested policy is sold, the initial lender/investor is
repaid with interest at the sales closing, and the investor
is responsible to pay future years’ premiums. The debtor/insured’s
trust keeps all sales proceeds over and above lender repayment
and accrued premium liability. Upon the insured’s death,
the investor receives the death benefits.
Non-recourse life insurance provided the debtor/insured creditor
protected financial gain with no cash outlay or liability as
well as free life insurance during the two year vesting period.
This financial vehicle is, however, not available for all people.
Only individuals with a financial net worth, age, and health
profile qualify for issuance of large life insurance policies
attractive to initial lender and long-term institutional financing
Younger individuals, in good health, who themselves are not
a candidate to profit from non-recourse insurance because of
their long life expectancy often assist their parents or grandparents
earn money through this financial product.
Non-recourse life insurance is extremely complex and involves
substantial legal documentation. A program improperly structured
could have adverse income tax consequences. Individuals interested
in pursuing creditor-protected investment in non-recourse life
insurance should consult financial professionals experienced
with this sophisticated financial product.
