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SOLI - Stranger Owned Life Insurance (Part 5 of 11)
Tuesday November 13, 2007 12:00AM | Click here to visit original article.
The point is that a life settlement is only a good deal for folks who have no beneficiaries or estate needs of any kind. If you take into both family and charitable aspirations, this is a very small market. If an old codger has heirs that he wants to benefit, or any other estate needs, then life settlements are not a suitable strategy. Instead, the old codger should do anything he can to keep the policy going, just like the investors would do if they got it. So, there are several significant problems with the life settlements market, and all of this discussion is just my way of meandering around to give you some background on life settlements so that we can discuss those problems. The first problem is that some bad guys in the life settlement market cannot leave well enough alone. Because there simply are not enough seniors who are situated like the old codger, i.e., have a large life insurance policy that they cannot afford to keep up, these bad guys look to basically "grow" future life settlements by arranging slick-sounding deals to encourage people who don't even have much life insurance yet to buy life insurance with the idea that later they will sell it. With these arrangements, known as SOLI (short for "Stranger-Owned Life Insurance") life insurance truly does become a pure investment with the policies grown like so many fields of corporate bonds awaiting future harvest. SOLI is a hot topic product right now among many life insurance agents who cater to wealthy people, since they can be pitched that they can get a very high level of insurance for two years (thus allowing the policy to mature past the noncontestability period), and then also make a tidy profit up front just for engaging in the transaction. If they don't have the money on hand to buy the life insurance policy up front, that's still no problemo as the investors will loan them the money, subject to taking the policy after the two years in repayment of the loan. This means basically Free Money (!!!) for those who allow life insurance policies to be bought on their lives. The problem here is that this is precisely the sort of thing which can - and should - draw Congress' attention to allowing life insurance to grow tax-free. Why these life insurance policies are allowed a tax-free build-up is anybody's guess, since they really are a pure investment that have little to do with protecting the family from the insured's death. Indeed, because of insurable interest requirements for the initial issuance of the policy, most of the people who are approached to engage in this type of transaction already have a large enough estate that they don't need these policies to protect their families, and indeed are almost immediately cashing out of them. In these situations, the life insurance really is no different than a corporate bond, and there really is no sensible reason that they should be taxed much differently. What is happening is a recognition that wealthy people have a hidden asset, which is their insurability. The bum at the bus station can't qualify for $5 million in life insurance, but many affluent and nearly affluent Americans can. If somebody has an estate worth $5 million, then they have an insurable interest of at least that. So why not take that unused asset and make some money off of it, right? Whether buying a lot of insurance makes financial sense for a person depends on a lot of factors, including their age, health, and what the internal rate of return will be. But when it does make sense, wealthy people should be taking advantage of their large insurable interest by purchasing as much life insurance as they can reasonably afford so as to either pay estate taxes or to further grow their estate (income tax free) for their children. Most wealthy people will not do this, of course, because they generally don't like life insurance no matter how much financial sense that it makes. What SOLI does is to turn this dislike of life insurance on its head so that wealthy people think that it is cool that they are not only making money but also selling a policy they never really wanted to these crazy investors. But in reality it is the wealthy folks who are stupid, and the investors who are smart. On a $10 million policy, a wealthy person might get $500,000 for selling their policy, but the investor will get $10 million on their death, less this $500,000 and any agent commissions, plus maybe a couple of million in keeping the policy going until the wealthy person kicks the bucket - at which time they might make $6 or $8 million in pure profits. You decide who is smart and who is stupid. If the wealthy people were really smart, they would simply buy as much life insurance as they could and hold it until their deaths. If they didn't have the cash on hand to buy it, they could always use the services of many lenders who are willing to finance the premiums with the loans being paid out of the policy proceeds at death. These days, many lenders are even willing to make these loans on a non-recourse basis, meaning that the policyholder is not even personally liable for the loan (the policy is used as security for the loan until the loan is paid off at death). But as discussed above, wealthy people let their dislike of life insurance (or maybe of life insurance salesmen) get in their way of what would be a really good investment for their families. ---Source: http://www.quatloos.com/life_settlement-life_settlements.htm |
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