Abstract:
A method and system for structuring a life settlement with a paid-up policy transaction. An existing insurance policy holder exchanges an existing insurance policy for a paid-up insurance policy or life insurance group certificate purchased by a buyer on a secondary market. The policy holder could also exchange its policy for being named as a beneficiary of a second insurance policy purchased by a buyer on a secondary market.

Description:
This application claims the benefit of provisional application Ser. No. 60/546,211 filed Feb. 23, 2004, the entire contents of which are hereby incorporated by reference. 

   FIELD OF THE INVENTION 
   The invention relates to life insurance transactions, specifically life settlement transactions and methods and systems for administering and managing those transactions. 
   BACKGROUND OF THE INVENTION 
   With the advent of a secondary market for life insurance policies, policy owners have an option in their management of life insurance polices. Due to various reasons such as retirement, health, changes in estate value, estate taxes or premium costs, the owner of a policy can now choose to sell the policy on a secondary market instead of surrendering the policy to the issuing insurer or allowing the policy to lapse. 
     FIG. 1  illustrates a typical insurance transaction flow between the policy holder  105  and the insurance company  103 . An Owner/Holder  105  first purchases a life insurance policy, as signified by the arrow  110  from an insurer (Insurance Company  103 ) on the life of an individual. The policy has a designated beneficiary of the owner&#39;s choosing. The policy has a certain face value, for example nine million dollars, to be received by the policy&#39;s beneficiary as a death benefit upon the death of the individual insured under the policy. The beneficiary may be the Owner  105  or the individual whose life is insured by the policy (not shown), or another person designated by the Owner  105 . The person whose life is insured may be the Owner  105  or another person for whom the Owner  105  has an insurable interest. At step  120  the Owner  105  of the policy pays a premium amount, for example five hundred dollars per month to the insurance company  103 , for the policy over a certain period of time based on various factors such as age and health. As the Owner  105  of the policy pays the premium  120 , a cash value for the policy may accrue if the amount of premium exceeds the policy&#39;s cost of the insurance. This cash value could vary depending upon the type of insurance policy, for example, term, whole life or universal life insurance, that is obtained. The policy may be redeemed by the Owner  105  for the cash value before the death of the insured. The cash value may also provide an additional amount of death benefit. 
   A life settlement is a sale of an existing life insurance policy by the Owner  105  of the policy to a buyer (Buyer), who is not the issuer of the policy. Typically, the purchase price for the policy is less than the face value for the policy, but more than its cash value. 
     FIG. 1A  illustrates a typical a life settlement transaction  100 . The life settlement transaction is designed to meet the insured&#39;s financial needs. Specifically, as the Owner  105  pays the insurance premium over a span of for example 30 years, various situations may arise in which the Owner  105  would need immediate access to cash, such as for repayment of loans, for retirement, for buying a business, for paying for healthcare, or when he otherwise would decide that he did not wish to continue making premium payments. Accordingly, in the life settlement transaction at step  130 , the Owner  105  would sell the policy to a Buyer  101  for a designated price, for example three million dollars. At step  140 , upon such an agreement, the Owner  105  would assign the Policy to the Buyer  101 , and in exchange, the Buyer  101  pays the Owner  105  in cash. As a consequence, the Buyer  101  becomes a holder (“Holder”) of the policy. In addition, at step  150 , the Buyer  101  begins paying the premiums for the Policy and at step  160  the Insurance Company  103  maintains the Policy but converts its owner to a Buyer  101 . As such, the Owner&#39;s  105  liquidity is increased. Upon the death of the individual whose life is insured by the Policy, the Buyer  101  receives the face value amount of the Policy, nine million dollars. 
   However, such a transaction will usually have unfavorable tax implications because the cash payment from Buyer  101  to Holder  105  is subject to capital gains and/or income taxes. Accordingly, there is a need and desire for a life settlement arrangement that allows the Holder  105  to sell his policy while reducing tax liability. In addition, such a transaction will leave the Holder  105  with less insurance than he may desire. Accordingly, there is a need and desire for a life settlement arrangement that allows a Holder  105  to continue to hold an insurance policy, albeit with a lower face amount. 
   Moreover, there is a need in the art for a computer system and a computerized method that manages and administers life settlement transactions in order that substantial numbers of settlements can be efficiently implemented and administered. 
   SUMMARY 
   The present system and method involves life settlement transactions with a paid-up life insurance policy (SWAPP) that allows a holder to sell his/her existing life insurance policy on the secondary market while minimizing tax liability for such a transaction and continuing to have some level of life insurance. 
   In a first embodiment, a person purchases a first insurance policy from an insurer. The first policy has a death benefit and names the person as the beneficiary. Subsequently, the person assigns the first policy to a buyer. The buyer then purchases a second insurance policy from an insurer and names the person as beneficiary of the second insurance policy. The second policy is paid-up and has a death benefit that is less than the death benefit of the first policy. The buyer is made a beneficiary of the first policy and receives the death benefit of the first policy upon the death of the individual whose life is insured. The buyer may be any individual or other entity. 
   In a second embodiment, a person purchases a first insurance policy from an insurer, and subsequently assigns the first policy to a buyer. The buyer then causes a paid-up second insurance policy to issue to the person with a death benefit that is less than the first policy. The buyer receives the death benefit of the first policy upon the death of the individual whose life is insured. 
   In a third embodiment, a person purchases a first insurance policy from an insurer. In conjunction with the sale, the seller joins a life insurance consumer association or other association having similar attributes and receives a paid-up group life insurance certificate under the association&#39;s group policy it has obtained from a life insurance carrier for its members. The buyer receives the death benefit of the first policy upon the death of the individual whose life is insured. 
   The invention can be implemented manually or electronically through a network of interconnected or accessible computers. The present invention implements a method of transacting a life settlement agreement comprising: receiving an assigned first insurance policy from a policy holder; purchasing a second insurance policy from an insurance company; naming said policy holder as a beneficiary of said second insurance policy; and collecting a death benefit of said first insurance policy upon an insured under the assigned first insurance policy being deceased. This method further comprises assigning a second insurance policy to said policy holder. This method allows the policy holder to name another person as the beneficiary of the second policy. 
   Further, the present invention implements a method of transacting a life settlement agreement comprising: receiving an assigned first insurance policy from a policy holder; purchasing a second insurance policy from an insurance company; assigning said second insurance policy to said policy holder; and collecting a death benefit of said first insurance policy upon said policy holder being deceased. 
   The present invention also implements a method of transacting a life settlement agreement comprising: receiving an assigned first insurance policy from a policy holder, wherein said first insurance policy is placed in a trust account; purchasing a group insurance policy from an insurance company on behalf of members of an association owning said trust account; assigning a life insurance group certificate to said policy holder; and collecting a death benefit of said first insurance policy upon said policy holder being deceased. 
   The present invention implements a computer based system for transacting a life settlement agreement, said system comprising: a computer processor for processing data; a storage means for storing data on and reading data from a storage medium; a computer program, said program implementing the steps of: managing receipt of an assigned first insurance policy from a policy holder; purchasing a second insurance policy from an insurance company; naming said policy holder as a beneficiary of said second insurance policy; and managing a collection of a death benefit of said first insurance policy upon an insured under the assigned first policy being deceased. 

   
     BRIEF DESCRIPTION OF THE DRAWINGS 
     These and other features and advantages of the invention will be better understood from the following detailed description, which is provided in connection with the accompanying drawings, in which: 
       FIG. 1  is a flow chart illustrating a conventional life insurance transaction; 
       FIG. 1A  is a flow chart illustrating a conventional life settlement transaction; 
       FIG. 2  is a flow chart illustrating a first embodiment of a life settlement transaction according to the present invention; 
       FIG. 3  is a flow chart illustrating a second embodiment of a life settlement transaction according to the present invention; 
       FIG. 4  is a flow chart illustrating a third embodiment of a life settlement transaction according to the present invention; and 
       FIG. 5  is a diagram of a processing system implementing the various embodiments of the invention. 
   

   DETAILED DESCRIPTION OF PREFERRED EMBODIMENTS 
   In the following detailed description, reference is made to the accompanying drawings, which are a part of the specification, and in which is shown by way of illustration various embodiments whereby the invention may be practiced. These embodiments are described in sufficient detail to enable those skilled in the art to make and use the invention. It is to be understood that other embodiments may be utilized without departing from the spirit and scope of the present invention. 
     FIG. 2  illustrates a life settlement transaction  200  according to a first exemplary embodiment of the invention. The life settlement transaction is based on a life settlement transaction  100  of  FIG. 1A ; however, the Policy Holder/Owner  205  (“Owner”) does not receive cash upon the assignment of the policy to a Policy Buyer  201  (“Buyer”). Rather, the Owner  205  receives the death benefit under a newly purchased second policy. 
   The Owner  205  purchases a life insurance policy (Policy  1 ) from an Insurance Company  203 . Subsequently, in step  230 , the Owner  205  reaches an agreement with a Buyer  201 , and the Owner  205  assigns Policy  1  to the Buyer  201 . 
   In exchange for this assignment, the Buyer  201  at step  240  purchases a second insurance policy (Policy  2 ) from a Second Insurance Company  207  and then names the Owner  205  at step  235  as the beneficiary of Policy  2 . The amount of insurance is calculated by the Buyer using conventionally known actuarial information. By way of example, the following illustration provides details about calculating the correct amount of insurance: 
   
     
       
             
             
           
             
             
             
           
             
             
           
             
             
             
           
             
             
           
             
             
             
             
           
             
             
           
         
             
                 
             
           
           
             
               Jan. 1, 1990 
               John Smith Purchases Life Insurance Policy from XYZ 
             
             
                 
               Life Insurance Company as follows: 
             
           
        
         
             
                 
               Owner 
               John Smith 
             
             
                 
               Insured 
               John Smith 
             
             
                 
               Beneficiary 
               Jane Smith 
             
             
                 
               Death 
               $9,000,000 
             
             
                 
               Benefit 
             
             
                 
               Premiums 
               $20,000/month for 30 years 
             
             
                 
               Cash 
               $0 
             
             
                 
               Surrender 
             
             
                 
               Value 
             
           
        
         
             
               Next 10 
               John pays $20,000 per month to XYZ Life 
             
             
               years 
               Insurance Company 
             
             
               Jan. 1, 2000 
               John Smith no longer needs the full $9,000,000 of death 
             
             
                 
               benefit and cannot afford the $20,000/month premium 
             
             
                 
               payment 
             
             
                 
               Details of his insurance policy with XYZ Life Insurance 
             
             
                 
               company are now as follows 
             
           
        
         
             
                 
               Owner 
               John Smith 
             
             
                 
               Insured 
               John Smith 
             
             
                 
               Beneficiary 
               Jane Smith 
             
             
                 
               Death 
               $9,000,000 
             
             
                 
               Benefit 
             
             
                 
               Premiums 
               $20,000/month for 20 years 
             
             
                 
               Cash 
               $1,000,000 
             
             
                 
               Surrender 
             
             
                 
               Value 
             
           
        
         
             
               Jan. 2, 2000 
               A buyer is willing to purchase the XYZ Life Insurance 
             
             
                 
               policy for $2,000,000. 
             
             
                 
               Due to the tax implications of receiving a cash payment, 
             
             
                 
               and John&#39;s continued need for death benefit protection, 
             
             
                 
               the buyer agrees to provide John with a new paid up 
             
             
                 
               policy 
             
             
                 
               as consideration for the assignment of XYZ policy rather 
             
             
                 
               than a cash payment. 
             
             
                 
               John assigns the XYZ Life Insurance 
             
             
                 
               policy to Buyer. 
             
             
                 
               Buyer purchases a new guaranteed paid up policy from 
             
             
                 
               ABC Life Insurance Company for a single payment of 
             
             
                 
               $2,000,000 
             
             
                 
               No cash consideration is paid to John 
             
             
                 
               by Buyer. 
             
             
                 
               The details of the two life insurance policies are 
             
             
                 
               as follows. 
             
           
        
         
             
                 
                 
               XYZ Life Insurance 
               ABC Life Insurance 
             
             
                 
                 
               Policy 
               Policy 
             
             
                 
               Owner 
               Buyer 
               Buyer 
             
             
                 
               Insured 
               John Smith 
               John Smith 
             
             
                 
               Beneficiary 
               Buyer 
               Jane Smith 
             
             
                 
               Death 
               $9,000,000 
               $6,000,000 
             
             
                 
               Benefit 
             
             
                 
               Premiums 
               $20,000/month for 
               One payment at 
             
             
                 
                 
               20 years 
               purchase of $2,000,000 
             
             
                 
               Cash 
               $1,000,000 
               $1,500,000 
             
             
                 
               Surrender 
             
             
                 
               Value 
             
           
        
         
             
               Next 5 
               Buyer continues paying $20,000/month to XYZ Life 
             
             
               Years 
               Insurance company 
             
             
                 
               John Smith pays no premiums to either insurance 
             
             
                 
               company. 
             
             
               Jan. 1, 2005 
               John Smith 
             
             
                 
               Dies 
             
             
                 
               XYZ Life Insurance Company pays $9,000,000 to Buyer 
             
             
                 
               ABC Life Insurance company pays $6,000,000 to Jane 
             
             
                 
               Smith 
             
             
                 
               Transaction terminates. 
             
             
                 
             
           
        
       
     
   
   The Owner  205  thus eliminates the tax implications related to a cash purchase, which is required to be reported as taxable income. Instead, the Owner  205  is the beneficiary of the second insurance policy, for which the Buyer  201  pays the premium payments to the Insurance Company  207  at step  245 . Accordingly, upon the death of the individual whose life is insured at step  235 , the Owner  205  receives the death benefit payment from Policy  2  where it would not have otherwise had there been a lapse or surrender of Policy  1 . Also, at Step  260  the Buyer  201  receives the death benefit payment from Policy  1 , which is greater than the death benefit payment of Policy  2 . 
     FIG. 3  illustrates a life settlement transaction  300  according to a second exemplary embodiment of the invention. The life settlement transaction is similar to life settlement transaction  200 ; however, the Owner  305  receives a paid-up insurance policy (Policy  2 )  340  instead of being a beneficiary of Policy  2 , as provided in  FIG. 1 . The Owner  305  purchases a life insurance policy (Policy  1 ) from an Insurance Company  303  at step  306 . Subsequently, the Owner  305  reaches an agreement with a Buyer  301 , and the Owner  305  assigns Policy  1  at step  330  to the Buyer  301 . 
   In exchange for this assignment, at step  350 , the Buyer  301  purchases Policy  2  from a Second Insurance Company  307  and pays all of the premium payments. At step  340  Policy  2  is issued by the Second Insurance Company  307  to be held by Owner  305 . Policy  2  can also be purchased from Insurance Company  303  instead of the Second Insurance Company  307 . The Buyer  301  then makes the premium payments for Policy  1  at step  355  and receives the death benefits of Policy  1  at step  360  upon the death of the insured individual. 
   One of the benefits that results in transaction  300 , like transaction  200 , is that the Owner  305  eliminates the tax implications from the cash consideration in this transaction, which cash would be required to be reported as taxable income. Instead, the Owner  305  owns a paid-up insurance policy, Policy  2 . Upon the death of the individual insured, the Buyer  301  receives the death benefit payment from Policy  1 , which in most instances is greater than the death benefit payment of Policy  2 . However, the Owner  305 , as beneficiary, receives a death benefit from Policy  2  where it would not have otherwise if there had been a lapse or surrender of Policy  1 . 
   Both embodiments  200 ,  300  as well as the third embodiment discussed below can be implemented manually or automatically through a computer system that is designed to administer and manage the transaction steps automatically, as well as calculate the premiums and face value for the second policy based on actuarial data. A computer based implementation is described in more detail in  FIG. 5 . 
     FIG. 4  illustrates a life settlement transaction  400  according to a third exemplary embodiment of the invention. In this embodiment, the life settlement transaction is similar to life settlement transaction  300 ; however, an Association or other type of member-based entity  401  is utilized to issue a group life insurance policy covering multiple Members/Sellers  430 . 
   As such, a Buyer  460  purchases at step  425  an existing life insurance policy (Existing Policy) from the owner of the policy, —Member/Seller  430 , who had previously purchased the Existing Policy at step  408  from the Insurance Company  440 . The Buyer also has in place, or puts in place at step  465 , an agreement with the Association  401  for the Buyer to make premium payments, allocate the death benefits that the Buyer receives from the existing Policy, or any other relevant obligations. Accordingly, the Buyer then proceeds to continue to make the premium payments at step  450 . Subsequently, at step  405 , the Member/Seller  430  becomes part of Association  401  by paying the required membership fees. 
   In exchange for the Member&#39;s  430  membership fees, at step  435 , the Member/Seller  430  receives membership benefits, including the ability to receive a Life Insurance Group Certificate (Certificate)  437  in conjunction with assigning the Existing Policy to the Buyer  460 . The Certificate represents a paid-up life insurance policy. The paid up life insurance policy is created as follows: at step  415 , the Certificate is obtained by the Association  401 , which purchases a Life Insurance Group Policy from a Second Insurance Company  410 . The Association  401  then makes premium payments  445  on the policy. Alternatively, the group life insurance policy can be purchased by another suitable entity that qualifies as a group insurance purchaser with the selected insurance carrier. 
   Upon the death of the Member/Seller  430  (or other individual whose life is insured), the Buyer  460  receives the death benefit payment from the Existing Policy at step  455 , which preferably is greater than the death benefit payment on the Certificate  475  received by the Association  401  or other suitable entity. However, the Member/Seller  430  or his/her beneficiary (not shown) receives a death benefit in the form of Membership Benefits  435  from the Association  401  where it would not have otherwise due to the lapse or surrender of the Existing Policy. 
   As previously noted,  FIG. 5  illustrates a computer-based system  600  for implementing the various embodiments of the present invention. It should be understood that each embodiment of the present invention can be implemented manually as well. Computer system  600  is merely an exemplary system, which has the ability to use multiple workstations, servers and personal computers as required. In one embodiment, the system  600  utilizes a pair of servers  606  and  608  and an Internet connection  604 , whereby an Insurance Company  440  can communicate electronically with an Association through Internet Connection  610  to conduct a group life insurance policy transaction. Many other configurations, however, can be employed, and this is only one example of an architecture. 
   In another example, the server and the data from which the server operates can be operated solely by or under the auspices of an insurance carrier  410  or  440 . The server can also be relied upon to calculate appropriate levels of insurance to purchase in exchange for the “purchased” policy and the actuarial factors relevant to both policies. In this example, an individual may become an Insured Member by, for example, using a personal computer  620  to communicate over the Internet  604  to a server  608  maintained by the Association  401 . In addition, using a server  606  and an internet connection  630 , an Insurance Company  410  can communicate with a Buyer  401  or  430  in a single life insurance policy transaction. A general purpose computer having a floppy drive and/or CD-ROM, such as a personal computer, laptop or a workstation may be used by the Insured Member to conduct transactions with the Association and/or Insurance Company (not shown). A computer program for instructing a computer or server to implement the various embodiments of the present invention is loaded onto a computer readable medium, workstation, server or personal computer for use by computer-based system  600 . 
   The above description and drawings illustrate embodiments, which achieve the features and advantages of the present invention. However, it is not intended that the present invention be strictly limited to the above-described and illustrated embodiment. Any modifications, though presently unforeseeable, of the present invention that come within the spirit and scope of the following claims should be considered part of the present invention. 
   It is well known in the art that any of servers, personal computers or laptop computers (e.g.,  604 ,  606 ,  608 ,  612  and  620 ) can possess at least central processing unit that interprets and executes instructions; input devices, such as a keyboard and a mouse, through which data and commands enter the computer; memory that enables the computer to store programs and data; and output devices, such as printers and display screens, that show the results after the computer has processed data. (Source: The American Heritage® Science Dictionary Copyright, © 2002 by Houghton Mifflin Company).