Suicide insurance is relatively new to the market. There are two main areas in which it can be used.
It is essentially used to protect third parties from net losses resulting from an individual’s suicide death, in a situation where the third party has advanced money to the deceased individual such as in the case of a structured settlement, an annuity or a lottery. It also can be used in a situation in which the third party has a business relationship with the deceased person, such as in the case of a key man or executive arrangement.
Here are some details on areas in which suicide insurance may be appropriate.
Structured Settlement Life Contingent Payments
Structured settlements involve a plaintiff in a personal injury lawsuit winning a cash award to compensate them for injuries sustained, with the actual payments of the award consisting of a series of periodic payments – usually monthly - over time. The payments are derived from an annuity issued by a major insurance carrier, and funded by the defendant in the lawsuit.
These awards often have two payment components. For example:
A. Period Certain group of payments - $5,000 per month for 120 months, and
B. Life Contingent group of payments - an additional $3,000 per month for as long as the plaintiff lives.
Depending on their needs for immediate cash, plaintiffs may choose to sell all or a portion of their future structured settlement annuity payments to a purchaser or investor in exchange for a cash payment today.
Such a transaction involves the determination of a cash purchase price based on discounting the future cash flow of the stream of payments, appearing before a civil judge to approve the transaction, and ordering the insurance carrier to direct all future payments to the new purchaser.
If the purchaser/investor buys period certain payments, their risk is minimal, since it is the creditworthiness of a major insurance carrier that guaranties the payments – as in any annuity.
However, if the investor chooses to buy a specific series of life contingent payments – because the yield on such payments is typically higher – there is an added risk of loss since such payments will stop if the plaintiff dies while that series of payments is being made.
To compensate for the risk of the plaintiff’s death, the investor will purchase a life insurance policy on the plaintiff, with a death benefit amount equaling the amount of the initial cash purchase price of the stream of payments. Through a collateral assignment agreement, the death benefit payments will be made to the investor in the event the plaintiff dies while life contingent payments are still in force. Since there is an investor and seller (plaintiff) relationship, there is a valid insurable interest between both parties.
This arrangement to mitigate the risk of loss of life contingent payments stemming from the plaintiff’s death has one major flaw. If the plaintiff commits suicide within the two-year contestability period, the insurance carrier can deny paying the death benefit. All investors in life contingent payment streams were aware and concerned, about this potential denial of payment by the carriers.
Until five years ago, there were no products in the insurance industry that directly addressed this suicide contestability risk.
In 2011, an insurance product was created that would pay investors of life contingent payments their full investment amount in the event that the primary life insurance carrier in a structured settlement arrangement denies a death benefit claim due to the insured’s suicide death. Referred to as suicide insurance, or Suicide GAP, the product is issued by Atlanta Life, with 95 percent co-insurance to Gen Re, requires no underwriting, is 100 percent issued and has a duration of 24 months or the expiration of the primary insurance contestability period, whichever is sooner.
As of 2016, the majority of those who have purchased life contingent payment stream products have elected to also purchase the Suicide GAP insurance as an added layer of protection for their investment.
Key Man Insurance Arrangements
Several months ago, we began to notice some broader application for Suicide GAP within the insurance market. We are now selling Suicide GAP into the key man insurance market.
Insurance industry data indicates that there are approximately 850,000 key man policies sold in the United States each year, with an average face value of $4 million per policy.
Key man insurance is used as a risk management strategy to compensate a company for the negative financial impact of a key executive’s death. This financial hardship thrust upon the company, its shareholders and or remaining partners would be considered an ascertainable net loss to the surviving business. The death benefit from the key man life insurance policy would be used to compensate the company for such hardship.
If the death of the key man or executive is the result of suicide occurring within the 24-month contestable period of the life insurance policy, then the insurance carrier has the right to deny payment of the death benefit. This denial would leave the company without the needed cash to recover from the death of the executive, find a new executive or to implement other strategies to save the business.
Suicide GAP Insurance, as it is applied to key man arrangements, eliminates the risk associated with a denial of a death claim payment to a third party by a life insurance carrier due to suicide death of the insured. The product can be used where an insurable interest third-party relationship exists in which the death of the insured carries with it an ascertainable net loss to that third party.
The coverage duration is also 24 months. Atlanta Life is the carrier, with 95 percent coinsurance to Gen Re. There are no underwriting requirements and the policy issue rate is 100 percent.
In the future, we predict broader market application of the Suicide GAP insurance. Suicide GAP insurance can mitigate risk in many unique insurable interest arrangements that currently exist in both the life insurance and property/casualty marketplace. These are situations in which a third party ascertainable net loss can occur upon the death of a party to any business or buyer and seller arrangement.
William Coluccio is president of Altium Group. He may be contacted at [email protected].
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