Monday, April 21, 2014

No. 43: Florida's Pasco County School District Faces a Decision on a "Too Good To Be True" Life Insurance Plan

On April 8, 2014, the Tampa Bay Times carried an article by Jeffrey S. Solochek entitled "Pasco school district scrutinizes creative life insurance offer." The article discusses a "legacy life" plan the promoters are trying to sell to the district. Here is how the article describes the plan:
Four New York families would put $100 million each into a premium on life insurance policies for Pasco's 9,769 school workers. The district would create a trust through which the employees could be insured and their families be paid a $50,000 benefit after they die. The district also would get a $50,000 benefit when an employee dies. Neither the district nor the employees would pay anything.
The Solochek article refers to the plan as a "55-year program," and says the promoters project "about 13 deaths per year in the early stages." Meanwhile, the $400 million would be invested, although the promoters are not divulging how the funds would be invested. The article says broker Edward H. Netherland (Nashville, TN) is a consultant to Swiss Re and Pollock Financial Group. (Netherland was involved some years ago in "Life Insurance and Life Annuities Based Certificates," or LILACs. See, for example, "Charities Look to Benefit from a New Twist on Life Insurance" in the June 5, 2004 issue of The New York Times.)

According to the Solochek article, Netherland said a "team of lawyers" found the plan "perfectly legal," and actuarial tables—which the school district does not have—showed the plan is viable. Netherland seems to be a name dropper; the article says he created similar programs before, "working with investors including Warren Buffett."

I have not seen the details of the plan. Nor is it likely the school district will ever see the details. Promoters of such plans claim the details are proprietary and confidential. At the same time, they respond to criticism by saying the critics do not understand the plans.

As I said in the July/August 2004 and July 2012 issues of The Insurance Forum, such plans will end in disappointment. Here is how I explained the problem:
The fundamental flaw is that such a plan can perform as illustrated only when the life insurance company underprices the policies. For the death benefits to be sufficient to service the debt and provide funds for the charity, the present expected value of the death benefits when the policies are issued must exceed the present expected value of the premiums. However, for a life insurance company to survive, the present expected value of the premiums must exceed the present expected value of the death benefits.
According to the Solochek article, the school district is trying to figure out whether the plan is "too good to be true." I think it is, because the plan is sure to collapse. What is not known is when it will collapse and degenerate into a legal battle involving the district, the investors, the promoters, the life insurance companies, and other parties. My unsolicited advice to the district is to reject the plan.