Method for combining loan with key employee life insurance

A leveraged whole or universal life insurance plan is administered using a computer processing method to ensure lender security, accumulation of value to an employee, and minimum tax exposure. The employer borrows in installments to partly cover insurance premiums on a policy owned by the employee, and pays interest on the loan for the life of the plan. The employee also pays part of the premiums, and collaterally assigns the policy as security for repayment of the loan. As the insurance policy appreciates in value, premiums decrease. The employee can pay down the loan and eventually eliminate premium payments, or can borrow against the policy for tax-free retirement income. The excess of the death benefit over any loan principal remaining upon the death of the employee is a tax-free payment to the employee's beneficiaries. The computerized method includes storing parameters of insurance policies and loan agreements in a computer memory, over ranges of possible death benefits, cash values, loan principals, and incremental payments over a span of years. Employee factors are quantified and input to the computer processor, which is programmed to integrate the employee factors with the insurance and loan terms to select an integrated loan/insurance arrangement to schedule payments to meet maximum contributions and retirement and life expectancy expectations. The processor adjusts incremental payments from the employer and the employee to ensure sufficient collateral and to comply with tax regulations that are unfavorable to certain front-loaded payment schedules.

BACKGROUND OF THE INVENTION 
1. Field of the Invention 
The invention relates to a method for processing certain financial and 
demographic data to define complementary terms for several related 
agreements, including an employer/employee agreement, a life insurance 
policy and a third party loan secured by the policy, and in so doing to 
apply certain revenue rules regarding permissible premium payment 
proportions and payment timing for adjusting a schedule of payments. The 
invention provides a convenient means to arrive at a workable 
tax-minimized arrangement for key employees to accumulate value with the 
assistance of their employers. 
2. Prior Art 
Life insurance is useful as an investment or savings tool as well as for 
its basic object of providing a death benefit payment to a beneficiary. 
This is true because a whole life policy develops a cash value. The cash 
value can be borrowed against, and any loans that are outstanding at the 
time of death can be settled from the death benefit. Such insurance is 
distinct from term insurance, which does not develop a cash value and is 
characterized by increasing premium rates as the insured person ages. 
An employer may find it appropriate to provide group life insurance to 
employees as a benefit. For example, an employer may provide group term 
life insurance on employees, financing the coverage itself or paying 
experience-rated rates. An employer providing such insurance, either alone 
or in conjunction with an insurance company, can at the same time provide 
term insurance naming the employees' beneficiaries, and also obtain 
insurance on the employees under policies naming the employer as 
beneficiary, to minimize the possibility of undue financial burden should 
an unusually large number of insured employees die over a short time. If 
the employer takes out whole life insurance (known as corporate-owned life 
insurance) in such an arrangement, the employer can borrow against the 
cash value, should the need arise. 
In general, the death benefit of an insurance policy is not taxable to the 
beneficiaries or to the estate of the insured. Internal Revenue Code 
Section 79, which concerns term life insurance, imposes imputed income on 
an employee with respect to company-paid insurance over a stated maximum 
($50,000). This section reduces the extent to which conventional insurance 
arrangements as above may shelter income from taxes. As explained in U.S. 
Pat. No. 5,429,506--Brophy et al., the disclosure of which is hereby 
incorporated, it may be desirable to combine a premium paying corporate 
life insurance plan with a voluntary employee group life plan. The 
premiums are split between the employer and the employee so as to provide 
a designated death benefit to the beneficiaries of the employee, while 
enabling the employer to invest funds in the cash value of the life 
insurance contract so as to help fund the group life benefits. As 
explained in the Brophy patent, there are a number of problems with 
attempts to make life insurance into a workable employee benefit plan 
having a cash value for the employee, while avoiding unnecessary taxation 
of either the employer or employee, as well as undue risk for the 
employer. 
There are various investment and savings techniques, including life 
insurance, and the different techniques carry different tax implications. 
In a "split dollar" insurance plan, payments are made by both the employer 
and by the employee. Payments by the employer are tax deductible business 
expenses, but payments by the employee must be made from after-tax income. 
The death benefit is not taxable under the present Internal Revenue Code. 
The employee's contribution effectively is taxed because it comes from 
after-tax income, and as such resembles a savings plan without tax 
liability as to appreciation (i.e., if the difference between the death 
benefit and the amounts paid in is positive). 
Comparing the tax consequences of various investment vehicles, there is no 
savings, investment and/or insurance technique that avoids taxation with 
respect to each of a contributing employer, employee and beneficiary. 
Investments in commodities that may appreciate, for example interest 
bearing accounts, mutual funds and the like, all are made from after-tax 
income. Appreciation income on liquidation of such investments is taxable 
(except perhaps in the case of municipal bonds). Qualified retirement 
plans, 401(k) plans and individual retirement accounts accumulate untaxed 
income, but taxes are simply deferred. The accumulated value is taxable at 
the taxpayer's tax rate when money is taken out of the tax deferred 
account. In addition there are limits on the amount of income that can be 
accumulated in tax-deferred accounts. The employer also may be required to 
make the plan available equally to all employees in order for the plan to 
qualify for tax-deferred treatment. Thus, such accounts cannot be used as 
a means to compensate key employees. 
Term life policies are characterized by increasingly higher premium rates 
as the insured ages. Whole life policies, on the other hand, normally have 
constant premiums but the premiums are substantially higher than term 
insurance premiums. During the life of the insured, the premiums paid in 
are invested by the insurance company. Income on paid-in premiums covers 
part of the death benefits payable, and also enable the insurance company 
to obtain a profit. 
The cash value of a whole life policy increases with aging of the insured, 
and can be borrowed against. Conversely, it is possible to borrow money 
for use as payment of an insurance premium. It would appear that borrowing 
to pay insurance premiums would be financially quite unfavorable for the 
insured. The insured would need to encumber collateral to secure the loan, 
and would incur interest charges on the loan. At least the principal 
payments on the loan would be from after tax income. Such an arrangement 
would appear beneficial only to insurance companies in that additional 
policies could be sold. Insurance companies have attempted to market 
insurance products comprising a loan by the insurance company to the 
insured of at least a portion of the premiums payable on a policy, with 
the cash value of the policy and the death benefit providing collateral 
for the loan. Due to interest on the loan premium and payments from 
after-tax income, this "leveraged" insurance can be expected to have a 
poor overall rate of return when all factors are considered. 
In any life insurance arrangement, the insurer calculates the appropriate 
premium payment as a function of mortality rates and the expected return 
on investments made with premiums paid in by all its insured persons, so 
that claims can be paid while earning a profit. In some plans the insured 
pays in more than the premium thus calculated, and the return on the 
investment of the excess (e.g., as interest) defrays part of the premium 
that would otherwise be payable. When an insurance policy is fully paid up 
such that the return on the insurer's investment of paid-in amounts covers 
all further premiums, the policy resembles a purchased annuity, a 
certificate of deposit or an interest bearing account. 
There are Internal Revenue Service limits on the extent to which premiums 
can be borrowed or paid in early so as to enable investment of the 
premiums to provide a return, while retaining the favorable tax treatment 
of a life insurance death benefit. Over the first seven years of a policy, 
for example, at least four parts in seven of premiums due must be paid in 
rather than borrowed. Internal Revenue Service and court rulings also 
distinguish an insurance policy from a modified endowment contract or an 
annuity. To be considered an insurance policy, less than 73% of the 
premiums due can be paid in over the first four years. Rules and 
regulations also define the permissible net single premium (NSP), 
guideline level premium (GLP) and guideline single premium (GSP). Failure 
to comply with such regulations, promulgated under DEFRA or TAMARA, can 
cause an ostensible insurance policy to be treated as a taxable 
investment, or may change the order in which payments made or withdrawn 
are deductible. For example under TAMARA, proceeds of the policy can be 
considered taxable income first, and deductible basis last, changing from 
a first-in-first-out taxation order to a last-in-first-out order. 
The DEFRA and TAMARA guidelines and similar regulations need to be observed 
to retain favorable tax treatment, but the rules are normally applied 
retrospectively. For example, the proportions of payments made are 
considered when the IRS conducts an audit or when an accountant assesses 
taxes that are due on activity during the previous year. 
Various inter-related factors are involved in considering the possibility 
of borrowing to pay insurance premiums. These include at least: the rate 
of interest payable on any loan taken out to pay premiums; the cash value 
at any given time and the amount of the death benefit (which will provide 
collateral for the loan); employee borrowing against the insurance policy; 
the proportion of premiums borrowed vs. the proportion paid-in, as well as 
the timing when particular amounts are to be paid; the proportion applied 
from after-tax income (by an employee) vs. deducted as a business expense 
(by an employer); the return on insurance company investment of paid-in 
contributions to meet scheduled premiums as provided by the terms of the 
insurance policy and the effect of unscheduled premiums (i.e., prepaid 
premiums); the employee's tax rate; and, the legal rules and limitations 
designed to exclude endowments from favorable tax treatment. 
All these factors vary with the circumstances. What is needed, and provided 
according to the present invention, is a data processing method that 
provides a practical insurance and investment product that meets the 
definitions of a proper insurance contract so as to qualify for favorable 
tax treatment, while ensuring that the investment of each of the parties 
is protected and not subject to undue risk. The object is to dovetail the 
terms of an insurance contract, a loan agreement and an employer/employee 
agreement, such that premiums are paid partly by the employer and partly 
by the employee, including via borrowed money, to provide for premium 
payments, to comply with IRS regulations and favorable tax treatment, and 
to permit the employee to accumulate value over a working career. 
The method is accomplished by storing in a file a set of constants that 
characterize the terms of at least one and potentially several alternative 
available life insurance contracts and loan agreements, which can be the 
offerings of different companies. Variables are then stored in a second 
file to characterize the situation of one or more particular employees, 
including each employee's tax rate, and including insurance related 
information such as age and potentially also health status information 
(e.g., smoking or nonsmoking). Also stored in the variables file are an 
amount that an employer is willing to contribute, or a desired cash or 
death benefit value to the employee, or both. The terms of a loan to pay 
premiums on the insurance policy then are calculated so as to include 
unscheduled (prepaid) premiums sufficient to have the policy fully paid 
within a predetermined time period. A set of limiting rules are then 
applied and a division of payments is made between the employer and 
employee to result in a payment schedule. The calculations and limiting 
rules ensure compliance with the tax codes and ensure that the value of 
the policy will provide sufficient collateral to cover the loan through 
the term of the agreement. Complementary terms of agreement are thereby 
defined between or among the employer, the employee, the lender and the 
insurer. In this manner, an insurance policy can provide a vehicle for 
accumulating value in a tax-minimized, safe and legal manner. 
SUMMARY OF THE INVENTION 
It is an object of the invention to automate the selection of an optimized 
collection of related terms of a combined insurance, loan and employment 
arrangement, legally to avoid unnecessary taxation while permitting the 
transfer of value from an employer to an employee. 
It is a further object of the invention to define a series of constant 
factors and a series of variable factors relating to an employee, an 
employer, an insurance contract and a loan; to provide a series of method 
steps whereby the factors are applied together with legal constraints and 
limits on the amounts and timing of contributions from the employer and 
the employee; and to produce a leveraged split dollar insurance plan 
having a predetermined term of years, with minimal tax exposure, and in 
compliance with present Internal Revenue rules. 
These and other objects are accomplished by a computerized method to 
administer leveraged split dollar whole or universal life insurance 
coverage. The method selects a schedule of incremental loan and premium 
payment figures, to ensure lender security, to provide an accumulation of 
value to the employee, and to minimize tax exposure. 
In general, the employer enters a loan agreement to partly cover employee 
insurance premiums and agrees to pay interest on the loan for the life of 
the plan. The employee takes out and owns the life insurance policy, 
paying the remainder of the premiums from after-tax income. The employee's 
contribution from after-tax income for his or her share of the premiums 
determines the employee's maximum necessary tax exposure under the plan, 
because the employer's contribution is deductible by the employer, and the 
ultimate proceeds of the policy are untaxable death benefits. It is also 
possible to schedule payments from the employer as bonuses to the 
employee, which may also be taxable to the employee. 
The employee agrees collaterally to assign the policy as security for the 
principal due on the loan taken by the employer. As the policy value 
accumulates over time andthe cash value of the policy increases, premiums 
decrease as appreciation of the policy offsets premiums due. The employee 
can pay down the loan, or alternatively can borrow money on the policy for 
retirement income or the like. At least by the end of a planned term of 
years, or upon the death or termination of the employee, the employer's 
loan is repaid. 
The computerized method includes storing the parameters of one or more 
available insurance agreements in a computer memory to define a policy to 
be supported over an agreement term of at least seven years during which 
premium installments are payable, and storing the parameters of one or 
more available loan agreements in the memory. In particular, successive 
loans are planned to meet the insurance premium installments. The stored 
parameters of the insurance and loan agreements encompass ranges of 
possible death benefits, cash values, loan principals, corresponding 
payments and terms of years. 
Quantitative factors defining a particular employee then are input to the 
computer processor. The processor is programmed to integrate the employee 
factors with the insurance and loan terms, for selecting a particular 
schedule of loans and premium payments. Factors are included such as 
desired contribution levels of the employee and the employer, employee age 
and retirement expectations, etc. The processor calculates corresponding 
insurance and loan terms over time, so that the insurance policy and the 
loan agreement are both supported. The processor then adjusts the 
contribution levels of the employer and the employee to arrive at actual 
payments to ensure sufficient collateral and compliance with tax 
regulations. 
Factors defining the employee include age upon commencement of the plan and 
expected retirement age, desired plan duration, maximum acceptable 
contribution amount and desired policy value. A number of these factors 
are interrelated and some can be determined by calculations using the 
other factors. Qualitative factors such as the employee's health status 
apart from age and statistical life expectancy may also be pertinent to 
the insurance agreement, such as whether or not the employee is a tobacco 
user. 
The processor selects or accepts input setting a policy value and plan 
duration, and determines from these factors the incremental premium 
required to support a policy in that amount over the chosen term of the 
plan. The processor then subdivides the premiums over at least the first 
seven years, to determine scheduled premiums payable by the employee, 
unscheduled premiums payable by the employer at least in part from amounts 
obtained under the loan agreement, and applies the DEFRA and TAMARA 
guidelines and limits for the guideline level premium, guideline single 
premium, net single premium and rules of taxation of modified endowment 
contracts. 
In at least a first three years of the term of years the employer payments 
include employer unscheduled premiums, and over the term of years the 
actual employer payments include all the employer unscheduled premiums 
plus interest on the loan agreement. No more than seventy percent of the 
sum of all scheduled and unscheduled premiums to be paid under the 
insurance agreement are paid during a first four years of the term of 
years from said scheduled and unscheduled premiums, such that the plan 
avoids unfavorable tax treatment as a modified endowment. After seven 
years of the term of years, the employee may terminate actual payments and 
use loans on the insurance policy to pay all or part of the scheduled 
premiums payable by the employee. However, such loans likewise require 
collateral, and by collateral assignment of the insurance policy as 
security for the loan taken by the employer, the employee may only borrow 
on the policy up to an amount that leaves a cash value and/or encumbered 
death benefit sufficient to offset the remaining principal due under the 
loan agreement. In any event, the actual employer and employee payments 
support a split dollar insurance policy owned by the employee and 
providing a tax-free death benefit to beneficiaries of the insurance 
policy equal to a difference between the death benefit and the loans on 
the insurance policy taken out by the employee. 
The combined loan agreement and insurance policy plan can be integrated 
with the employee's retirement program. This is accomplished by adjusting 
the employer and employee contributions such that loans on the insurance 
policy by the employee are in part used for retirement income to the 
employee, thereby reducing the difference between the death benefit and 
the loans on the insurance policy. 
The quantitative factors affecting the particular computation of amounts, 
preferably include the age of the employee, a planned retirement age, a 
planned retirement duration, a minimum number of years for payment of 
scheduled premiums, a maximum incremental payment, an employee tax 
bracket, and at least one health factor affecting statistical longevity, 
such as whether the employee is a smoker. 
The plan according to the invention minimizes but does not eliminate tax 
consequences to the employee. Inasmuch as IRS rules prohibit using 
borrowed money for four or more of the initial term of seven years (or a 
4/7 proportion of the total paid during that seven years), a portion of 
the premiums are obtained from the employee's after-tax assets. Part of 
these employee payments can be paid as bonuses to the employer, to supply 
taxable income to offset the premiums. On the employer side, however, as 
much as 96 to 98% of the cost of the plan is a tax deductible business 
expense. 
Additional aspects of the invention will become apparent in connection with 
the following discussion of nonlimiting examples, and specific 
applications of the plan to exemplary employee conditions.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS 
The plan of the invention generally involves a computerized method for 
integrating an employer/employee agreement together with loan and life 
insurance policy agreements, and calculating and coordinating the values 
of certain monetary transfers set into the agreements, in order to 
generate a financial plan that optimally exploits the appreciation and 
favorable tax treatment of life insurance policies, and the availability 
of capital from secured loans. A set of agreements on coordinated terms 
among several parties are determined from parameters of available 
insurance and loan agreements. Factors defining the employee are applied 
to the parameters of the two agreements, to enable a transfer of value in 
general from an employer to an employee, while minimizing the tax 
consequences of the plan to the employer and employee. The result is a 
transfer that is up to 98% tax deductible as to contributions of the 
employer, and up to 50% tax deductible as to contributions of the 
employee. 
The plan leverages the life insurance policy by providing for borrowed 
money to pay insurance premiums, via a loan agreement secured by the 
insurance policy. The premiums required to support an insurance policy of 
a desired face value do not directly define the amount of the loan 
agreement, and instead according to the invention, calculations are made 
to enable a practical plan of contributions while complying with or 
gaining the benefit of standing tax rules, regulations and procedures 
regarding the permissible levels of contribution from loans and the timing 
of insurance premium payment. Thus the process of the invention takes into 
account the taxation consequences of particular payment schedules, policy 
value buildup, payout/liquidation procedures and taxation consequences 
upon withdrawal of value from the plan, and application of the tax free 
insurance policy death benefit. 
FIGS. 1a through 1d illustrate generally the flow of value according to the 
plan. In FIG. 1a, the large double arrow represents the exchange of 
services by an employee 40 for remuneration by the employer 20. The basic 
object of the plan is that in consideration of the value of the employee's 
services for the employer (especially for a key employee), the employer 
desires to assist the employee in accumulating assets at a rate greater 
than the employee could afford to do alone. More specifically, employer 20 
is to help employee 40 to purchase an insurance policy 60 of a larger face 
value than the employee could otherwise afford. To accomplish this, the 
employer contributes to the payment of the premium on the larger policy 
60. The basic configuration of FIG. 1a could result if the employer simply 
increased the salary, bonuses or other remuneration paid to compensate the 
employee, which additional money the employee could apply to the purchase 
of insurance. Such compensation would be deductible by the employer, but 
taxable to the employee at a rate characteristic of the employee's tax 
bracket. Moreover, such an increase could place the employee in a higher 
tax bracket than before. An arrangement where an employer pays a portion 
of premiums of an insurance policy, known as a split dollar arrangement, 
is provided whereby part of the premiums needed to support a policy owned 
by the employer are from employer payments and part are from employee 
payments. Although substantially equivalent to the employee paying 
premiums from after-tax earnings, a split dollar plan has certain tax 
advantages, provided the policy is owned by the employee. 
As shown in FIG. 1b, according to the plan of the invention, employer 20 
borrows a principal amount from a lender 80, uses the borrowed sum to pay 
a portion of premiums on policy 60, the remainder of the policy premium 
being due from employee 40. According to this arrangement, over the term 
of the plan, employer 20 need only pay the interest on the loan taken to 
offset its portion of the insurance policy premiums. The cash value and/or 
death benefit of insurance policy 60 supply collateral to secure the loan. 
Over time, the accumulation of value in policy 60 exceeds the amount of 
the loan, which can paid off at the end of a predetermined time period, or 
settled from the death benefit on the policy in the event of the 
employee's death. 
Insofar as the cash value of policy 60 exceeds the principal due on the 
loan at any point before the loan is paid, the money is also available as 
collateral for additional loans to be taken out by the employee. Such 
loans can be employed either for purpose of providing income to the 
employee (which income is not taxable), or for offsetting the employee's 
contribution to ongoing premiums (likewise from sums that are borrowed and 
not taxable). According to the invention, all these transfers of value are 
coordinated to minimize tax exposure in the long run. 
The employer, employee, lender and insurance company are all separate 
entities operating at arm's length. The employee applies for and is the 
owner of the life insurance policy in his own name. The terms of the 
policy have conventional premium rates, rates of return and the like, 
which depend on the employee's age, the desired size of the policy (i.e., 
the amount of the death benefit), etc. The employer and the employee each 
have limited assets to pay premiums, so the policy is to be chosen of a 
sufficient size to be supported by the combined payments that the employer 
and the employee are willing to make. The premium paid by the employee may 
be from his own assets, or may be a bonus from the employer or double 
bonus, etc. These employee contributions to the premium are from after-tax 
income, and are referred to as the scheduled premium. 
The premium payable by the employer is in two parts, and is referred to as 
the unscheduled premium. Part one of the employer-payable premium to the 
employee-owned policy is borrowed from lender 80. By collateral assignment 
of the insurance policy, the employee agrees to return the borrowed money 
to the employer (or more accurately to the lender) upon termination of the 
plan. The policy is pledged as security for the loan. The employer agrees 
to pay all interest on the loan until termination of the plan and 
retirement of the debt to lender 80. Part two of the employer-payable 
unscheduled premium is an on-going payment of premiums to the insurance 
policy covered by the assignment, also secured by the policy, which is not 
borrowed. This amount is also returned to the employer upon termination of 
the plan. FIG. 1c shows that during operation of the plan, the employer 
pays substantially only interest on the loan to lender 80, and the 
employee pays an ongoing premium amount on the policy 60. FIG. 1c shows 
alternatives that occur upon termination of the plan, when policy 60 or 
loans on policy 60 repay the principal on the loan, taking employer 20 out 
of the arrangement. The remainder of the policy passes to the employee's 
beneficiaries 100 in the event of death, or if the employee has simply 
terminated employment, this remainder is available to the employee, for 
example for retirement income from loan taken from lender 80 or others, 
and secured by policy 60. 
An object of the invention is to determine the respective amounts 
(proportions and timing) of the scheduled (employee) premiums and the 
borrowed and unborrowed unscheduled (employer) premiums, so as to comply 
with the tax regulations respecting favorable treatment of life insurance 
policies and to accumulate value that will inure to the benefit of the 
employee or his beneficiaries. As shown in FIG. 2, the employer's 
contribution is subdivided into an employer ("ER") contribution early in 
the plan, preferably in the first and second year, and an employer ongoing 
contribution, substantially devoted to the loan interest. The employee 
("EE") contribution is ongoing. 
Several tax code regulations apply and are used according to the invention 
to set the proportions payable by the employer and employee, and when the 
employer contributions (especially the early contributions) can be made. 
According to certain tax rules, an insurance policy is construed as a 
modified endowment contract or single premium policy rather than a 
conventional insurance policy if too high a proportion of the premiums are 
paid initially, or if too high a proportion is funded by borrowed money. 
Nevertheless, it is an aspect of the plan that initial premium payments 
are made by the employer, with borrowed money. No more than 73% of the sum 
of scheduled and unscheduled premiums can be paid during the first four 
years of a policy, and no more than three of the first seven years of 
premiums (assuming equal premiums) can be borrowed. Other similar rules 
are applied as well, including DEFRA and TAMARA regulations defining 
applicable guideline level premiums, guideline single premiums and net 
single premiums. The total policy premiums are calculated to adhere to the 
regulations while scheduling large but permissible premium payments in the 
first years (especially the first three of seven years) from loans. Thus 
the payments are allocated and scheduled to meet the proportions and 
timing of contributions needed to comply with the regulations. 
To meet the 4-of-7 rule, the plan cannot be terminated before 7 years, but 
the plan can have a payments term of at least five years and up to 20 
years, during or after which term the loans taken by the employer to pay 
premiums and secured by collateral assignment of the policy, are to be 
retired. Preferably, the employer premiums from the loan are divided into 
three equal parts, payable over the first three years. To comply with the 
73% rule, the sum of scheduled (employee) and unscheduled (employer) 
premiums are set slightly below the limit, for example at 70% of the sum 
of premiums to be paid under the policy during the first seven years, and 
are paid over the first four years. These limitations, factored together 
with the desired maximum contribution levels of the employer and employee, 
provide concurrent equations from which the processor generates a list of 
specific payments by the employer and the employee. Most of the employer 
payments can be funded from the third party loan. No other premium 
payments can be borrowed (i.e., by the employee), at the risk of 
unfavorable tax consequences. 
The foregoing limitations under the initial years of the policy are 
intended to provide a safe haven for treatment of the plan as an employee 
owned leveraged insurance contract. It would be possible for the employee 
to own the insurance contract in this manner without paying off the 
employer loan, for so long as the employer continues to pay the interest. 
However, the assignment of the policy to offset the principal would 
decrease the amount available to the employee's beneficiaries as a death 
benefit, and would prevent the accumulation of value (against which the 
employee may borrow), which is the object of the plan. Therefore, employee 
scheduled premiums under the plan are calculated and scheduled to retire 
the loan over or at the end of a predetermined term of years such as 20 
years, and the term determines the annual premium payable by the employee. 
The premiums paid into the policy produce an income to the employee, 
measured by the economic benefit or appreciation of the cash value of the 
policy in excess of premium payments. This is calculated using PS-58 or 
the insurer term rates. Such income offsets a portion of the premium 
payable into the policy by the employee. Other things being equal, either 
the amount of the premium can be reduced over time in view of 
appreciation, or the policy face value can be increased accordingly. 
After the first three years (FIG. 1c) and before termination (FIG. 1d), the 
employer continues to pay annual tax deductible interest payments on the 
loan taken out for the original premium payments. The employer preferably 
also makes planned small (2 or 4%) premium payments into the policy. The 
employer at least pays the interest annually billed on the loan, which is 
a deductible expense to the employer in the year paid, but not for more 
than 12 months in advance. 
The employee likewise continues to make annual payments to the policy. This 
continues for the term of the plan, which as noted above is 5 to 20 years, 
as predetermined when originally designing the plan and calculating the 
respective payments. After the nominal 5 to 20 year term, the employer and 
the employee both may stop payments. Alternatively, the plan can be 
arranged so that at the end of the nominal term, the payments continue for 
a further term as preselected, whereupon the death benefit and cash value 
of the policy are built further. 
The plan is terminated and settled upon (1) death of the insured employee; 
(2) voluntary termination of the plan at the end of the nominal term; (3) 
involuntary termination of the plan through non-compliance by the employer 
(to pay interest) or the employee (to pay premiums); or (4) termination of 
employment by the employee or employer. In the event the plan is 
terminated before the end of the seventh year, no money can be withdrawn 
or loaned until the end of the seventh year without risk of adverse tax 
consequences. 
FIG. 2 schematically connects the elements of the plan according to the 
flow of value. FIG. 3 shows the information files needed and the steps 
undertaken by a computer processor 120 to effect the plan by integrating 
an insurance policy and a loan agreement (and/or choosing among a 
plurality of alternative policies and agreements) and integrating the 
particular amounts. Referring to FIG. 3, a first step is defining terms 
126 representing at least one available insurance agreement for a life 
insurance policy to be owned by the employee. The insurance agreement is 
defined by storing data representing the terms 126 of the insurance 
agreement in a memory 122 of the computer processor 120. 
In general, the policy terms include a particular incremental premium 
payment applicable for a person of given characteristics such as age and 
health status, to purchase a whole life or universal insurance policy 
having a given death benefit. The total premium can be subdivided into 
installments over time, which may be equal in each year of a predetermined 
term or may vary from year to year, in order to purchase the insurance 
policy. The employer and employee desire or can afford to support an 
insurance policy at a specific level of incremental payments, namely with 
a larger policy being available upon payment of larger premiums, and vice 
versa, according to a formula that at its simplest provides a proportional 
relationship between the premium and the amount of death benefit. Assuming 
that the policy is purchased over a given number of years, the 
relationship of the paid-in premiums and the death benefit or risk to the 
insurer in any one year, is met by the insurer by investing the paid-in 
premiums such that the available fund to pay death benefits increases over 
time until needed. As a result, by completing purchase of the policy in a 
certain number of years, the death benefit and cash value of the policy 
are ensured, and no further premium payments are necessary. 
In any event, the stored terms defining the insurance agreement include a 
relationship of premium payments due in order to purchase life insurance 
over a predetermined term of at least seven years, in a range of values 
encompassing at least one of a predetermined death benefit range, a 
predetermined cash value range, and a predetermined premium payment range. 
A particular level and schedule of premium payments to be made can then be 
selected to provide a resulting death benefit--cash value figure, or in 
reverse order, selecting a desired death benefit--cash value figure will 
produce a resulting premium payment needed. 
At least one available loan agreement is also defined, the loan to be taken 
by the employer. As with the policy, the loan agreement terms 128 are 
defined in data and stored to represent the terms of the loan agreement in 
the memory 122 of computer 120. The terms of the loan agreement include a 
relationship between principal and interest payments needed to pay off the 
principal. Preferably, loans to the employer are incremental during the 
initial years, and the loan terms 128 are to be used to choose 
predetermined principal amounts borrowed over the set term of years, and 
corresponding interest payments over the same term for the applicable 
balance of principal. The loan agreement terms 128 permit choice of a 
principal amount within a loan principal range. As with the insurance 
policy, the loan agreement is defined substantially as a proportion, 
namely the interest rate payable on the principal. 
According to the plan the life insurance will at all times have a cash 
value sufficient to pay off the outstanding principal of loans taken to 
meet premiums. As a part of the combined insurance/loan and 
employer-employee agreement package, the insurance policy will be 
collaterally assigned to the employer to pay off the outstanding loan 
principal if the employee dies or employment is terminated. Other assets 
of the employee and the employer need not be encumbered, and the financial 
institution making the loan is fully secured. 
The terms of the insurance agreement and of the loan agreement form a set 
of constants stored in computer memory 122, defining insurance policies 
and loans over ranges of death benefits, cash values, loan principals and 
terms of years, and in which the policy cash value range and the loan 
principal range overlap. The computer processor 120 accepts input employee 
and employer data 132 for at least one employee to participate in the 
plan. The employee data defines quantitative factors characterizing the 
employee's situation. Preferably, two or more such factors are chosen 
from: a desired death benefit amount, a desired contribution level of the 
employer and a desired contribution level of the employee, and preferably 
additional factors are input as conventionally applicable in the purchase 
and sale of life insurance, such as the employee's age and any information 
relating to expected longevity (e.g., smoker or non-smoker, family 
history, fitness information such as blood pressure, cholesterol level, 
etc.). 
Referring to the processor steps in FIG. 3, the processor or computerized 
data processing means 120 applies input data 132 to the insurance 
agreement terms and loan agreement terms stored in memory 122, to 
determine necessary premium payments, and to equate a sum of 
yet-to-be-determined contributions or payments of the employer and the 
employee with a particular loan principal such that the sum of 
contribution levels of the employer and employee is sufficient to offset 
the principal and interest payments of the loan agreement, and the amount 
of the insurance premiums. 
The processor is programmed to then adjust or subdivide the sum of 
employer/employee payments to meet standing rules for the maximum 
proportion of borrowed money to pay premiums (4/7) and the maximum portion 
of premiums that can be paid in the first three years (73%). Additionally, 
the DEFRA and TAMARA guidelines are applied to ensure compliance with the 
guideline level premium, guideline single premium and net single premium 
limits, namely by reducing or rescheduling for a later time any sums 
otherwise calculated in excess of the limits. The rules provide concurrent 
equations that determine the amount of premium payments that must be met 
by employee payments as opposed to employer payments, and constrain the 
extent to which premiums can be borrowed or paid in early in the initial 7 
years. 
A schedule of incremental employer payments and employee payments over time 
are thereby automatically generated, determining the incremental loan 
principal amounts to be borrowed and determining the interest payment 
needed. A division of payments between sums borrowed by the employer (and 
secured by the policy), and sums payable by the employee from after-tax 
income, is made as a part of the process in order to comply with the 
above-described limitations that apply due to tax regulations. 
The data processing means adjusts the contribution levels of the employer 
and the employee to provide actual employer payments and employee 
payments. The actual employee payments, termed "scheduled premiums" in 
this disclosure, are determined in calculated amounts payable for at least 
five years, and preferably between 7 and 20 years. In at least a first 
three years of the term of at least seven years, the actual employer 
payments include so-called unscheduled premiums together with all interest 
on the loan agreement. The payments are then subdivided such that no more 
than seventy three percent, and preferably no more the seventy percent 
(for a safety margin) of the sum of all scheduled and unscheduled premiums 
to be paid under the insurance agreement are paid during the first four 
years of the term of years from said scheduled and unscheduled premiums, 
and over the first seven years, no more than four of the seven annual 
premium payment (or a proportionately equal number) are made using money 
borrowed either by the employer or the employee. These rules represent the 
limits under which the leveraged insurance arrangement can be regarded as 
favorably treated life insurance instead of a modified annuity or the 
like, under the present tax laws. 
The following Table I shows an example output of the processor obtained 
according to a typical insurance policy having a nominal million dollar 
death benefit (which actually can be variable depending on economic 
returns on investment according to the terms of the policy), over the 
initial 7 years. 
TABLE I 
______________________________________ 
SEVEN YEAR FUNDING TERM 
Employee Employer 
Scheduled 
Unscheduled 
Policy 
Year Loan Amount Premium Premium Premium 
______________________________________ 
1 $34,386 $14,700 $7,033 $56,119 
2 34,386 
14,700 
3,767 
52,853 
3 34,386 
14,700 
500 
49,586 
4 500 
15,200 
5 817 
24,823 
6 817 
24,823 
7 817 
24,823 
______________________________________ 
The plan can be arranged to fully fund the insurance policy in as few as 
five years; however the annual employee premiums in the foregoing example 
over five years require employee and employer payments to complete funding 
in the fifth year of $72,018 and $2,450, respectively. In addition, the 
four-of-seven rule prohibits borrowing against the policy until the 
minimum seven year term elapses. Therefore, employees will normally prefer 
funding over 7 to 20 years, in which case the employee and employer 
premiums range from $24,006 and $817 in the example of Table I, to $14,700 
and $500 for funding over 9 to 20 year terms of years. 
In the example shown in Table I, a further payment that should be 
considered is the interest payable by the employer on the loan taken to 
pay the employer's borrowed portion of the premium during the first three 
years. The employer loan is in three equal annual installments, such that 
the interest payments due from the employer are $3,267, $6,533 and $9,800 
during the first through third years (i.e., increasing with the additional 
principal each year). From the third year until retirement of the loan 
(assuming it is not paid down earlier by the employee), the principal is 
constant, as is the employer interest payment, namely $9,800. Thus, over 
the first five years, the total annual cost allotted to the employer, 
deductible as a business expense, is $10,300 annually for 4 years and then 
$10,617 annually until the loan is retired or paid down. 
Assuming a key employee 45 years of age in an income tax bracket of 40%, 
who intends to retire at age 65, pre-tax annual contributions of $25,000 
and after-tax contribution of $15,000, assuming an interest rate of 6.75%, 
will accumulate a cash value of $873,156 in the insurance policy upon 
retirement, or a net income of $61,250 per year. The employee may 
terminate actual payments and use loans on the insurance policy to pay all 
or part of the scheduled premiums after the initial seven years, or take 
loans against the policy to obtain income, especially for retirement 
income. Such loans reduce the net value because the policy would be 
pledged as collateral and proceeds of the policy would pay off the loans 
upon the death of the insured. Nevertheless, the actual employer and 
employee payments are sufficient to support a split dollar insurance 
policy owned by the employee and providing a tax-free death benefit to 
beneficiaries of the insurance policy equal to a difference between the 
death benefit and the loans on the insurance policy taken out by the 
employee. 
Using the computer processor according to the invention and projections of 
economic factors in the future, the integrated insurance policy and loan 
agreement of the invention can be used further to plan an employee's 
retirement income. Table II illustrates such a plan wherein the 45 year 
old employee, from the plan of scheduled and unscheduled premiums over a 
twenty year term during which average interest rates (and return on 
insurer investment) is 6.5%, can pay off the remaining loan principal and 
retire upon reaching age 65 and over the next twenty years receive an 
income of $61,250 by borrowing against the policy and still retain a death 
benefit of $283,311 at age 85. 
TABLE II 
______________________________________ 
NET VALUES AFFECTED BY LOAN ACTIVITY 
Death Benefit 
Age Annual Outlay 
Accum. Loans 
Accum. Value 
Available 
______________________________________ 
45 $56,119 $0 $53,087 $1,310,309 
46 52,853 
1,363,478 
47 49,586 
1,363,478 
48 15,200 
1,363,478 
49 15,200 
1,363,478 
50 15,200 
1,363,478 
51 15,200 
1,363,478 
52 15,200 
1,363,478 
53 15,200 
1,363,478 
54 15,200 
1,363,478 
55 15,200 
1,363,478 
56 15,200 
1,363,478 
57 15,200 
1,363,478 
58 15,200 
1,363,478 
59 15,200 
1,363,478 
60 15,200 
794,036 
61 15,200 
857,361 
62 15,200 
733,009 
923,591 
63 15,200 
992,846 
64 15,200 
1,065,250 
65 -184,208 
61,250 
737,783 
898,386 
66 -61,250 
126,481 
724,226 
887,423 
67 -61,250 
195,953 
709,485 
874,757 
68 -61,250 
269,939 
693,455 
860,215 
69 -61,250 
348,736 
676,018 
843,605 
70 -61,250 
432,653 
657,044 
824,717 
71 -61,250 
522,026 
636,595 
791,627 
72 -61,250 
617,207 
614,618 
754,532 
73 -61,250 
718,576 
591,094 
713,168 
74 -61,250 
826,533 
566,010 
667,249 
75 -61,250 
941,508 
539,483 
616,593 
76 -61,250 
1,063,956 
510,573 
592,757 
77 -61,250 
1,194,363 
478,995 
566,545 
78 -61,250 
1,333,247 
444,430 
537,647 
79 -61,250 
1,481,158 
406,510 
505,707 
80 -61,250 
1,638,683 
364,808 
470,308 
81 -61,250 
430,967 
82 -61,250 
1,985,117 
387,125 
83 -61,250 
2,175,399 
338,143 
84 -61,250 
2,378,050 
283,311 
______________________________________ 
As shown in Table II, an annual outlay of $184,208 is scheduled during the 
year of retirement at 65 years of age. This amount represents in this 
example a loan against the accumulated cash value of the policy to cover 
$61,250 of income to the now-retired employee, $103,158 principal to 
retire the loan, and a premium payment of $19,800, causing the cash value 
of the policy to dip somewhat upon the changeover. 
The particular amounts paid in and withdrawn by loans against the cash 
value of the policy are of course variable, and dependent on economic 
rates of return as well as the terms of the policy and the loan agreement. 
It is possible to forecast best case and worst case scenarios for economic 
return in order to provide a cushion against lean times. In other 
respects, the plan values are determined from quantitative factors 
characterizing the employee, such as the age of the employee, the planned 
retirement age, the planned retirement duration, a minimum number of years 
for payment of scheduled premiums, a maximum incremental payment, the 
employee's tax bracket, and health or longevity factors that are factored 
into the relationship of the insurance premiums to the death benefit/cash 
value of the policy. 
The invention having been disclosed in connection with the foregoing 
variations and examples, additional variations will now be apparent to 
persons skilled in the art. The invention is not intended to be limited to 
the variations specifically mentioned, and accordingly reference should be 
made to the appended claims rather than the foregoing discussion of 
preferred examples, to assess the scope of the invention in which 
exclusive rights are claimed.