It seems perfectly logical and may have multiple uses

By Douglas I. Friedman

Every so often, a new idea comes along in the life insurance industry that makes the mind race with possibilities.

That has happened in the last few months. Ive been encountering novel combinations of a life insurance product with a casualty product to insure against an unfavorable financial result. Why didnt I think of that myself? It seems perfectly logical, and it may have multiple uses.

Significantly, it also reflects a convergent trend that the industry has not yet really discussed, or predicted.

Example: My office recently reviewed materials for a premium financing sale utilizing such a combination. In addition to receiving an assignment of the life insurance policy to secure the loan, the lender would buy a casualty policy for the transaction. The casualty policy insures against the life insurance policy cash values being insufficient to secure the lender if the borrower defaults on the loan.

Having such insurance apparently allows the lender to proceed without requiring other collateral. Often in premium financing cases the lender will require collateral other than the policy because in the early years the cash values are insufficient to secure the loan fully.

In this specific case, the lender charged the borrower an amount to cover the cost of the casualty insurance. So, in addition to the cost of the loan itself, such as interest expense, the borrower had to consider the cost of the casualty coverage. But, the casualty coverage may permit the borrower to keep other assets unencumbered.

Presumably, the resulting flexibility keeps these other assets available for investment opportunities that may yield higher returns than the cost of the casualty policy.

On the other hand, though, since premium financing loans usually have to be renegotiated periodically, such as every five years, the borrower has the additional consideration that the cost of the casualty insurance may increase when the loan terms are renegotiated. Such an increase could materially affect the viability of the transaction, such as by then causing high-earning assets to be pledged as collateral.

Nevertheless, the combination of a life insurance policy with a casualty policy probably can be utilized in many other situations like this one, to insure against an unfavorable financial result. The main effect on the transaction is that the overall profitability would just be less.

Another recent example comes from the life settlement market. When a viatical company buys a policy, one risk assumed is that the insured will outlive life expectancy, in which case the viatical company may incur a loss on that policy. In the recent case, the viatical company purchased a casualty policy to protect against this unfavorable result. The casualty policy thus works like a life insurance policy in reverse.

Interestingly, the result is that both the life insurer and the viatical company base the transaction upon life expectancy but with different products involved.

Using a casualty policy in the premium financing market at first appeared to be a novel combination of products. But, following review of the viatical situation shortly thereafter, I started to feel the way I do when learning about a new use for technology. That is, ones mind races to consider the possibilities, and then stops thinking usually because the possibilities are endless and thus overwhelming.

Reading through that viatical transaction had just that kind of impact.

Further review suggests that many more such instances of a convergence of life and casualty products will emerge. The uses would seem limitless, as well as natural.

Therefore, insurance professionals who work at the cutting edge of the business should expect to see a continuing evolution of sales ideas that combine life insurance with products (i.e., casualty policies) that previously had been considered to be unrelated to the life insurance market.

Douglas I. Friedman, a partner in the Friedman & Downey, P.C. law firm of Birmingham, Ala., is national counsel on estate and business planning for insurers. His e-mail is doug@fdatty.com.


Reproduced from National Underwriter Edition, December 3, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.