Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Insurance
Reexamination Certificate
1997-08-04
2004-01-27
Millin, Vincent (Department: 2164)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Insurance
Reexamination Certificate
active
06684189
ABSTRACT:
I. BACKGROUND OF THE INVENTION
A. Technical Field of the Invention
This invention concerns an electrical computer and a data processing system, and methods involving the same, applied to the financial fields of insurance and mortgages. More particularly, this invention relates to a computer system for preparing, processing and transmitting life insurance premium quotes as part of a mortgage calculation in support of a new financial product. In the new financial product, life insurance is used as collateral and a means for repayment of a mortgage, and facilitates the purchase of real estate without (or with a greatly reduced) down payment. The invention includes automated aspects of the use of premiums paid on life insurance as a substitute for the initial down payment on a mortgage, the use of life insurance policy death benefits to retire the mortgage upon the death of the borrower, the use of accumulated cash values to retire the outstanding principal on a mortgage in the event of the borrower's survival, and the services of storage and transmission of data for all of the foregoing.
This invention optionally also relates generally to a computerized system for preparing and processing multiple universal life insurance quotes and for preparing and processing universal life insurance applications, based upon those quotes. More particularly, the present invention relates to a machine, manufacture, process, and improvement thereof.
More particularly, this invention relates to a computer system for preparing, processing and transmitting life insurance premium quotes as part of a mortgage calculation in support of a new financial product. In the new financial product, life insurance is used as collateral and a means for repayment of a mortgage, and facilitates the purchase of real estate without (or with a greatly reduced) down payment. The invention includes automated aspects of the use of premiums paid on life insurance as a substitute for the initial down payment on a mortgage, the use of life insurance policy death benefits to retire the mortgage upon the death of the borrower, the use of accumulated cash values to retire the outstanding principal on a mortgage in the event of the borrower's survival, and the services of storage and transmission of data for all of the foregoing.
B. Description of the Background Art
In the United States, the declining supply of low-cost housing and the inability of many low-income renters to save enough money to make a down payment has forced many potential home buyers out of the housing market, according to a study released Mar. 17, 1988, by the Harvard University Joint Center for Housing Studies. (Reported in the Mar. 28, 1988, Bureau of National Affairs Banking Report.) To address this problem in the United Kingdom, a way has been found to combine life insurance and a mortgage into what is known as an “endowment mortgage.”
A UK endowment mortgage is a balloon payment mortgage combined with an endowment life insurance contract. A UK endowment life insurance policy provides life insurance coverage and tax-free accumulation of premium dollars invested in the life insurance policy over a stipulated time period—usually between twenty and forty years. The lender and the insurance company work in concert to engineer a balloon payment mortgage linked to an endowment life insurance policy so that, at the end of the mortgage period, the cash value accumulated via the life insurance is sufficient to repay the mortgage in a single, lump-sum “balloon” repayment.
A home buyer financing the purchase of a home with a UK endowment mortgage pays no principal to the lender over the term of the mortgage. Monthly loan payments are limited to interest only. The mortgage principal is repaid separately by using the life insurance policy. This principal accumulates in an endowment life insurance policy—a universal life insurance policy with a level death benefit equal to the purchase price of the home. The premium dollars invested grow over the term of the mortgage to meet the amount of the principal borrowed to purchase the home. In the last year of the mortgage, the life insurance policy “endows,” and the homeowner uses a one-time tax-free distribution from the life insurance policy to repay the mortgage.
The endowment mortgage has numerous advantages to UK borrowers and lenders. First, it is more tax-efficient for borrowers than a conventional amortization mortgage. This is because monthly payments include only interest and are therefore 100 percent tax deductible. Second, principal payments, made in the form of premium payments to the endowment policy (less the cost of mortality and insurance charges), accumulate tax free. This causes endowment policy assets to grow more rapidly, and in turn allows lenders to lower the amount of the required down payment. Third, it is a more secure lending vehicle for the lender. The lender has collateral rights to both the mortgaged property and the insurance policy. Fourth, because of the insurance component of the endowment mortgage, the homeowner has built-in security that so long as he or she maintains the mortgage payments, the survivors will inherit the mortgaged property free of the mortgage.
Subsequent generations of products have expanded on the endowment mortgage concept in the UK. Derivative versions of the product include the so-called Pension Mortgage and Personal Equity Plan (PEP) Mortgage. Both products link the UK equivalent of an Individual Retirement Account or Keough Account, term insurance, and a balloon payment mortgage. These financial products include all of the characteristics of an endowment mortgage (full deductibility of mortgage interest payments, life coverage, and tax-free accumulation of principal). The term insurance provides the life coverage component of the endowment mortgage, the Pension or PEP provides the tax-free accumulation of principal, and the balloon payment mortgage provides fully deductible loan interest. In addition, both the PEP and Pension mortgages have the additional benefit of offering at least a partially deductible principal repayment. Both PEP and Pension contributions are tax-deductible up to certain limits.
Endowment mortgages dominate the residential mortgage market in the UK. For example, approximately 82 percent of all mortgages underwritten in the UK in 1988 were endowment, pension, or PEP type mortgages. Conventional amortization type mortgages, similar to those commonly available in the United States, are also available in the UK, but these accounted for only 18 percent of new mortgage sales in 1988.
Despite their great success in the UK, endowment type mortgages have not similarly dominated the United States residential mortgage market, apparently largely due to the different laws of each nation. In the United States, federal statutes forbid most lenders from selling life insurance. Also, most states have laws forbidding tie-in sales of mortgages. A tie-in sale occurs when a lender insists that a borrower buy a particular insurance product from a particular life insurance company. Legal impediments also exist for life insurers wishing to lend money as an inducement to sell insurance. Further, in the United States the tax treatment of life insurance is different from that in the United Kingdom. In the United States, policyowners must pay taxes on policy distributions in excess of the basis (for US tax purposes, the basis is equal to cumulative premium payments) in the contract. In the UK, distributions from endowment type insurance contracts are tax free.
Thus, in the US there is a unique problem of how to lawfully combine a mortgage and life insurance and additionally make a viable financial product. Accordingly, it is not surprising that computer systems to illustrate such a financial product have been lacking in the United States.
A proposal to combine life insurance and a mortgage, implemented by means of a computer system, has been made in U.S. Pat. No. 4,876,648, titled “System and Method for Implementing and Administrating a Mortgage Plan” (Charles
Marquart Ronald G.
Ryan Ronald B.
Akers Geoffrey
Millin Vincent
The Ryan Evalulife Systems, Inc.
Trzyna, Esq. Peter K.
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