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 tool 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 are 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 a 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, the 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 certain 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. An improperly structured program 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.

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.