It seems perfectly logical and may have multiple uses
By Douglas I. Friedman
Every so often, a new idea comes along in the life insurance industry that makes the mind race with possibilities.
That has happened in the last few months. Ive been encountering novel combinations of a life insurance product with a casualty product to insure against an unfavorable financial result. Why didnt I think of that myself? It seems perfectly logical, and it may have multiple uses.
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Significantly, it also reflects a convergent trend that the industry has not yet really discussed, or predicted.
Example: My office recently reviewed materials for a premium financing sale utilizing such a combination. In addition to receiving an assignment of the life insurance policy to secure the loan, the lender would buy a casualty policy for the transaction. The casualty policy insures against the life insurance policy cash values being insufficient to secure the lender if the borrower defaults on the loan.
Having such insurance apparently allows the lender to proceed without requiring other collateral. Often in premium financing cases the lender will require collateral other than the policy because in the early years the cash values are insufficient to secure the loan fully.
In this specific case, the lender charged the borrower an amount to cover the cost of the casualty insurance. So, in addition to the cost of the loan itself, such as interest expense, the borrower had to consider the cost of the casualty coverage. But, the casualty coverage may permit the borrower to keep other assets unencumbered.
Presumably, the resulting flexibility keeps these other assets available for investment opportunities that may yield higher returns than the cost of the casualty policy.