Arbitrage life, according to its creator David B. Simon, is a way of financing life insurance. It works through individual trusts set up by STP Enterprises Inc. of Chicago.
A 45-year-old non-smoker who signs up for an arbitrage life policy through First Transamerica of New York City, according to STP's example, borrows $202,260 from Manufacturer's Hanover through the trust. The loan covers premiums for 10 years.
The customer then sells the cash value of the life insurance policy over the next decade to the trust. In return, the arbitrage life trust invests the funds and pays interest and premium payments for the customer over the next decade, when the loan is paid off.
The customer pays only the arbitrage, or the difference between the costs and the investments. There is no payment in the first year, with supplemental payments in future years, according to the projections, ranging from $3,6840 to $5,360, a substantial decrease in the $15,000 to $20,000 yearly payments someone with that much insurance could expect to pay.
Sales of arbitrage life were suspended in April by the New York State Insurance Department.