Premium Financing: An Ideal Way to Pay for Life Insurance
(Part 2)


Life Insurance and Premium Finance

In part two of our series on life insurance premium financing we explain and compare the different types of financing. To get an overview of premium financing and how it can benefit seniors looking to purchase life insurance please refer to part 1 of the series.

 

Full Recourse Premium Financing

In this instance, the insured is getting a traditional loan for which they are 100% personally liable for repayment. It’s based on traditional loan factors as well: the credit of the borrower, quality and quantity of collateral, etc.

In a full recourse loan, the policy is held as collateral, but it is only considered for as much as its’ cash surrender value. The senior typically needs to post an investment account or real estate as additional collateral to secure the loan. Full recourse loans require a senior to place considerable “skin in the game” via a personal guarantee as well.

The high collateral and personal guarantee requirements limit the market of seniors who find this form of financing attractive. Full recourse premium financing is generally most appropriate for seniors with substantial non-income producing assets or high return alternative investments.

Regarding duration, typically full recourse loan terms are either evergreen (for life) or renewable over a period of years. Interest rates on these kinds of loans vary, but seniors who qualify for these programs are usually able to get the most competitive market rates.

 

Non Recourse Premium Financing

Non-recourse premium financing was an innovative concept that provided funds without the senior having to post any collateral or personal guarantee. The credit of the senior was typically not even relevant as the loan underwriting focused exclusively on the policy’s appraised future life settlement value. Hence, these loans were typically only available to seniors over 70 whose policies had a clear high life settlement value.

However, this type of financing is no longer accepted by insurance companies. The simple reason being that the carriers correctly assessed that these loans would, 99 times out of 100, lead to settlements, and they found that writing new policies that would be resold to investors a losing proposition.

Obviously, due to the fact that seniors were not required to post collateral or assume personal liability to repay the loan, non-recourse loans were a popular product. But life insurance carriers became rightly concerned that policies were being bought purely with the intent to resell. This became unacceptable to the life insurance carriers and therefore, carriers no longer allow non recourse premium financing.

 

Hybrid Premium Financing

When life insurance companies stopped accepting non-recourse premium financing, it effectively eliminated a line of business. This decision also lead to a significant decline in new policies being purchased by seniors.

Obviously, life insurance companies suffer when sales decline. As a result, the industry has developed a new category of financing called hybrid premium financing. Even though many of these policies are still resold on the life settlement market, life insurance companies are more receptive to this type of financing.

In hybrid financing plans, some personal collateral or guarantees are required, but far less than with a full recourse loan. Most of the risk is assumed by the lender as the majority of the collateral value securing the loan is the life policy. The lender’s security in these cases is the value of the life insurance policy on the secondary life settlement market.

Many seniors find that hybrid financing options are an excellent choice for their circumstances. It makes buying life insurance very affordable and they have modest amounts of collateral personally exposed to risk.

In cases involving hybrid premium financing, the qualifications of the insured mimic those of a non-recourse loan (e.g., over 70 years old) and the duration of the loan mimics that of a full recourse loan (a minimum of five years).


About the author:

David Mickelson, ChFC, AEP is an expert in wealth strategies for seniors. He has helped hundreds of seniors with life insurance, life settlements, and all aspects of estate planning.





 

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Premium Financing

There are many premium financing programs available, each with their pros and cons. But most programs fall into the types we describe in this article.



Links

Find out what premium finance is and whether it’s a good option for you.

Find out how smart seniors and their advisors use life settlements to great advantage.