Looking for the answer to the question below related to Management ?
Who benefits in Investor-Originated Life Insurance (IOLI) when the insured dies?
Options:
| a) beneficiary b) insured c) policyowner d) insurer |
The Correct Answer Is:
- c) policyowner
Answer Explanation:
Investor-Originated Life Insurance (IOLI) is a relatively complex and controversial financial arrangement that involves the sale of a life insurance policy by the policyholder (insured) to an investor.
The concept revolves around the idea that the policyholder, typically an elderly individual, sells their life insurance policy to an investor, who then assumes responsibility for premium payments and ultimately collects the death benefit when the insured passes away.
To better understand who benefits in IOLI when the insured dies, we will delve into each option provided and explain why the correct answer is “c) policyowner,” while the other options are not correct.
- Correct Answer:
c) Policyowner
In an Investor-Originated Life Insurance (IOLI) arrangement, the policyowner is the individual who initially purchased the life insurance policy. When the insured individual passes away, the policyowner is the one who benefits. Here’s how:
Sale of the Policy: The IOLI process begins with the policyowner selling their life insurance policy to an investor. In exchange for the policy, the policyowner typically receives a lump sum payment from the investor. This lump sum payment is often greater than the policy’s cash surrender value but less than the death benefit.
Premium Payments: After the sale, the investor becomes responsible for paying the future premiums on the policy. This relieves the policyowner of the financial burden of maintaining the policy. The policyowner no longer has to worry about making premium payments.
Death Benefit: When the insured individual eventually passes away, the death benefit is paid out to the policyowner’s beneficiary. In most cases, the policyowner designates a beneficiary who will receive the death benefit upon their death. This beneficiary can be a family member, friend, or any individual chosen by the policyowner.
Benefit to the Policyowner: The primary benefit to the policyowner in an IOLI arrangement is the lump sum payment received from the investor when they sell the policy. Additionally, if the policyowner chooses a beneficiary, their chosen beneficiary will receive the death benefit upon their death, providing financial security to their loved ones.
In summary, in an IOLI arrangement, the policyowner benefits from the lump sum payment received when selling the policy to an investor and can also ensure financial protection for their chosen beneficiary through the policy’s death benefit.
Why the Other Options Are Not Correct:
Now, let’s explore why the other options are not correct in the context of IOLI:
a) Beneficiary
In an IOLI arrangement, the beneficiary is the individual or entity designated by the policyowner to receive the death benefit when the insured passes away. While the beneficiary does benefit from the policy’s death benefit, they are not the primary beneficiary of the IOLI arrangement.
The beneficiary’s benefit is contingent on the insured’s death, and they have no direct involvement in the sale of the policy to the investor or the financial transaction between the policyowner and the investor.
Therefore, while the beneficiary does benefit from the policy, they are not the party benefiting when the insured dies in the context of IOLI.
b) Insured
The insured is the individual whose life is insured by the policy. In an IOLI arrangement, the insured individual typically does not directly benefit when they pass away. Instead, the insured individual often plays a passive role in the transaction.
They may consent to the sale of the policy, but the primary financial transactions occur between the policyowner and the investor. The insured does not receive a payout when they die; rather, the death benefit goes to the beneficiary designated by the policyowner. Therefore, the insured does not benefit directly from their death in the context of IOLI.
d) Insurer
The insurer, which is the insurance company that issued the policy, does not directly benefit when the insured dies in an IOLI arrangement. In fact, the insurer’s role is to pay the death benefit to the beneficiary as stipulated in the policy contract.
The insurer is obligated to fulfill the terms of the policy, and their primary role is to provide financial protection to the beneficiaries upon the insured’s death. The insurer does not participate in the sale of the policy to an investor or the financial transactions between the policyowner and the investor. Therefore, the insurer does not directly benefit from the insured’s death in the context of IOLI.
Conclusion:
In conclusion, the correct answer to the question of who benefits when the insured dies in an Investor-Originated Life Insurance (IOLI) arrangement is the policyowner. The policyowner benefits from the lump sum payment received when selling the policy to an investor and can also provide financial security to their chosen beneficiary through the policy’s death benefit.
The other options, including the beneficiary, insured, and insurer, do not directly benefit from the insured’s death in the context of IOLI, as their roles and interests are distinct from those of the policyowner in this financial arrangement.