This article was co-authored by Dan Young, President of Vida Capital Management
Retained coverage insurance settlements (RCIS) are gaining in popularity amongst owners of life insurance policies as a way to offload premium payments without losing the full death benefit of an insurance policy.
The life settlement market
was born out of two stated reasons for the sale of policies; that the policies were: 1) unwanted; and/or 2) unneeded. The recent recession and stock market volatility have added a third reason why insureds are bringing their policies to market: that they are unaffordable.
The market has responded with retained coverage insurance settlements (RCIS) to address this type of seller who wants to retain the policy but cannot afford the premiums. This type of transaction has created a win/win for sellers and buyers, with great advantages for both.
In RCIS, the life settlement provider makes an offer of a small amount of upfront cash and allows the seller to retain a percentage of the death benefit
. Usually, the majority (if not all) of the upfront cash is used to pay life settlement broker and producer commissions. During the closing process, 100 percent of the ownership of the policy is changed to the investor, while the seller is made an irrevocable beneficiary for its pro-rata portion of the death benefit. The investor is also responsible for paying 100 percent of the premium obligation moving forward.
Typically, there is a reversion clause as well, whereby the seller takes the policy back if the investor fails to pay premiums, thus protecting the seller from a lapse situation.
The benefits of the RCIS to the seller who wishes to retain the life insurance
are substantial. The RCIS option allows the seller to keep a portion of the coverage, while completely doing away with any future premium obligation. Thus the seller retains wanted insurance coverage without the ongoing burden of premium obligations.
This transaction is also great for the return to investors. The minimal upfront cash allocation usually causes a RCIS to generate higher yields than the typical life settlement transaction. The investor is also able to purchase more of these transactions compared to traditional life settlements. With an increase in the number of policies purchased, the investor is able to generate a higher level of diversification in its portfolio. This diversification gives the investor a higher probability of achieving a favorable actual to expected in relation to maturity events. Finally, the RCIS dilutes the collection risk that an investor usually has in a life settlement portfolio by
giving the seller an incentive to cooperate with collection procedures.
Of course, there are complexities to any life settlement transaction
and RCIS may not be right for every situation. For the insureds inclined to sell a policy for purely financial reasons, however, an RCIS allows the seller to feel good knowing that a retained portion of the death benefit will still benefit loved ones. For the investor inclined to make a smaller outlay of upfront cash, an RCIS allows the investor a higher potential return, as well as greater diversification and less risk in collection of death benefits. This type of transaction can therefore truly constitute a win/win for both seller and investor.