Annuity and Life Insurance Arbitrage

Apr 17, 2007

  1. Sam
    Offline

    Sam Founder Administrator

    Posts:
    1,535
    Likes Received:
    61
    As has been mentioned, the concept of "free" life insurance has been around for a long time. I do know some people who actually HAVE made millions doing it, and I will explain how their version works.

    You start off with a financial institution, perhaps a bank, or an investment house or even an insurance company, that has a lot of money that they need to put in safe domestic investments. In this case, it was one of the top 5 largest banks in the country.

    The brokers are asked to look for people that are over age 75, in decent health, and have a net worth of at least 5 million dollars. You approach them and explain that they have an asset that they are under utilizing and it is their insurability. Since they have a large asset base, insurance companies would write a large policy on them without any problems.

    As an example, for someone with a net worth of 20 million, the offer would be: The bank will loan a trust 4 million dollars, which will be used to purchase a SPIA on the prospects life that pays out enough every year to pay for the premiums on a 10 million dollar life insurance policy. The bank will give the wealthy prospect $500,000 for free right now, for participating in the transaction. The policy is owned by the trust, which has an outstanding loan from the bank. When the person lives past 2 years, the bank buys the debt ridden trust for another $500,000. At this point, the prospect has made 1 million dollars for "free" and the bank has invested 5 million dollars in a policy that will pay them 10 million when the person dies.

    The essence of the arbitrage is that if the person lives for a short time, the life insurance company loses, if they live for a long time, the annuity company loses. No matter what happens, the bank, the prospect and the agent will always get their money. Sometimes the bank gets a good rate of return, and sometimes a poor rate, but averaged out, they are doing very nicely, and the money is safe.

    These numbers are just an example, and their are many variations of this type of thing. The originators of this idea tell agents and brokers that if they bring them a prospect and they qualify for this arbitrage, then they will get a cut of the commissions from both the SPIA and the life insurance. 2 or 3 cases and you are a millionaire!

    The way that this is pitched most frequently is to find non-profit organizations that have some wealthy donors. It is pitched that the non-profit will get a piece of the 500k, or perhaps the full thing. They in turn can approach their donors and ask if they would like to do something to benefit the organization, and it won't cost them anything.

    Now THIS is a product that has made millionaires!
     
    Sam, Apr 17, 2007
    #1
  2. Guest
    Online

    Guest Guest

    Why is a 'trust' necessary? Why is a SPIA necessary? Why can't the bank just buy an insurance policy on the person?

    Al
     
    Guest, Apr 17, 2007
    #2
  3. Sam
    Offline

    Sam Founder Administrator

    Posts:
    1,535
    Likes Received:
    61
    There are actually 2 separate trusts that are involved. They serve several purposes. First, they enable there to be insurable interest, while still protecting the bank if the prospect dies in the first year. I can't take out insurance on you, and a bank can't just take out insurance on me. My trust can take out insurance on me, as I own it. However, the trust owes the bank money, so even if he dies right away, the trust will be the beneficiary, but it will need to pay the bank whatever the contract stipulates.
    If you cut out the trust and have the prospect own the policy, then you run the risk of his having other creditors who can get first claim on the insurance payout.

    The second purpose is in order to make the up front money be an "advance on life insurance" and thus tax free. I do not understand all of the ins and outs of this aspect, but they tell me that it is a vital part of the deal.
     
    Sam, Apr 17, 2007
    #3
  4. maxreferrals
    Offline

    maxreferrals Expert

    Posts:
    64
    Likes Received:
    0
    So, from what you are describing here, it seems as those
    this involves pitching the idea to two (2) prospects?

    The bank and the potential insured (prospect) ?
     
  5. Sam
    Offline

    Sam Founder Administrator

    Posts:
    1,535
    Likes Received:
    61
    No, the bank is already on board and would love new prospects. There is just one pitch, to a prospect. The lawyers who set this up the discuss the situation and benefits and tax ramifications with the prospects lawyer or accountant.
     
    Sam, Apr 17, 2007
    #5
  6. honestagent
    Offline

    honestagent Guru

    Posts:
    477
    Likes Received:
    1
    Melmunch, what you've depicted is a lifesettlement scenario, am I right to assume? Or is this something entirely different?
     
  7. Sam
    Offline

    Sam Founder Administrator

    Posts:
    1,535
    Likes Received:
    61
    This is something mostly different. It does have the element of buying an existing policy, but that is where the similarity ends.

    A settlement is for an existing policy. This scenario creates the policy for its own purposes.
     
    Sam, Apr 18, 2007
    #7
  8. somarco
    Offline

    somarco GA Medicare Expert

    Posts:
    29,566
    Likes Received:
    3,436
    State:
    Georgia
    Seems the system crashed with my earlier post and it got lost in cyberspace.

    Joe Belth has some interesting insight into SOLI (another term used for this kind of transaction).

    http://209.85.165.104/search?q=cach... insurance arbitrage&hl=en&ct=clnk&cd=8&gl=us

    Other sites of interest include

    http://www.pgdc.com/usa/item/?itemID=238024

    http://www.rightrates.com/wealthtransfer/arbitrage.php

    This is a highly specialized field. Most agents will never have the ability to develop this kind of client. It takes a long time to generate the kind of relationship with the right people to make even one sale, much less several.
     
    somarco, Apr 18, 2007
    #8
  9. Sam
    Offline

    Sam Founder Administrator

    Posts:
    1,535
    Likes Received:
    61
    I agree. It takes a lot of trust and credibility to get people to even listen to this pitch. It has also become more difficult over the last couple of years, as rates have risen sharply in the +65 life arena. Nevertheless, it has and will continue to make millionaires out of those who can and do do the transactions. From what I have seen, a law degree or background really helps.
     
    Sam, Apr 18, 2007
    #9
  10. James
    Offline

    James Guru

    Posts:
    2,152
    Likes Received:
    0
    Yes that is the truth! I would imagine that 412i plans are more likely than the SOLI. Yes you can become a millionaire if you write enough 412i plans but good luck, sure you fall into one every blue moon but even at that the average agent can not do it on their own, its time to take a large cut of commission and go get some help if available if not forget it! Plus more than likely people with the ability for this type of market have numerous agents from the big companies that specialize and financial rep's routinely pitching these plans.

    412i plan, easy go find a person over 50 or 55 to 60 is better. Has a lot of cash flow and has no retirement plan in effect or has little saved up and looking to quickly fund their retirement plan. Easy as pie, well untill you attempt to start the process then things seem to change quickly to say the least!:D
     
    James, Apr 18, 2007
    #10
Loading...