A trust is established to borrow money from a bank and use the proceeds to pay the
premium. A pledge of the CSV of the policy serves as collateral for the loan to the trust.
In effect, the bank is providing a loan to pay the premium for a universal life insurance
policy with the CSV serving as collateral.
On each month anniversary of a policy, the CSV
is charged for mortality costs and a carrier administration fee. Interest on the bank loans
varies depending on the loan
structure. The policy uses the investment income from the CSV to pay the interest on the
loan. Any shortfall is made up from deposits held by the bank which STP
established at the inception of the loan or made up by
payments from the policyholder.
To the extent that there’s a difference
between the bank’s interest rate and the insurance company’s net crediting
rate and
the insurance company’s net rate is higher, it results in a "positive
arbitrage". When the net crediting rate is
higher than the loan rate, the trust benefits from a favorable arbitrage position. This
favorable arbitrage position may offset some or all of the policy costs.
