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exceed the net cash value of the policy. The policies provided
that at the insured's death, any policy debt will be deducted
from the proceeds of that policy. The policies were the sole
security for any loans. Interest on petitioner's loans was due
on each policy anniversary date. The policies provided for both
a fixed and variable loan interest rate.
The policies were modified by a Renewable Level Term
Insurance Rider. The rider provided death benefits equal to the
amount of death benefits lost as a result of a withdrawal from
the account value. Under the provisions of the rider, petitioner
had the option on any policy anniversary date to elect to change
from the 11.06-percent policy loan interest rate to a fixed rate
of 10 percent in arrears or 9.1 percent in advance which would
apply to both old and new policy loans. For the 1993 COLI policy
year March 1, 1993 to 1994, petitioner elected the variable loan
interest rate of 11.06 percent.
The final provisions governing the COLI policies purchased
by petitioner in June 1993 were devised to produce results in
accord with those set forth in the June 4, 1993, projections
contained in appendix B.
On July 19, 1993, petitioner entered into an Administrative
Services Agreement with Coventry in which petitioner appointed
Coventry as the administrator of the COLI pool. Under the
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