As the life settlement industry continues to grow, agents are increasingly likely to come into contact with one of the subsets of life settlement transactions, those involving premium-financed insurance policies.
Premium financing was around long before life settlements came into being in the insurance industry. At the recent Life Insurance Settlement Association conference in New York, Scott Cipinko, executive director of the Life Insurance Finance Association, said premium financing is among the more misunderstood issues within the life insurance and life settlement industries. These mechanisms, he said, were designed for “someone who has their capital tied up but is considered ‘wealthy’” and needs to protect their assets.
Robert Finfer, president of Integrity Capital Partners in Bethesda, Md., said he expects to see considerable growth in the life settlement market for premium-financed policies over the next 36 months as those policies with non-recourse financing reach the end of their financing period. Typically, he said, non-recourse financing programs are designed to run for 24, 30 or 36 months, and the uptick in premium-financed policies that began a few years ago means that more and more of those policies will be brought to the secondary market going forward.
Brokers within the life settlement industry offer two main pieces of advice to agents if they have clients with premium-financed policies and are looking to bring it to the secondary market. First, agents need to ensure that they have all of the documentation relating to the premium-financing agreement, and second, they should absolutely seek out advice from others who have more expertise on the issues connected to premium finance and life settlements.
“The first thing that I can think of is that they need to understand what the premium finance documents say,” said Ted Pryor, CEO of Stamford, Connecticut-based LifeOptions, LLC. “Each program is a little different” in the details about the timing of repaying the loan and the process, he added.
Premium-financing programs, he said, generally give the insured a “window” of time to refinance the policy or pay back the loan, with the deadline for this usually occurring about the time of the end of the contestability period. It is imperative, Pryor said, to know exactly how repaying the loan would work beforehand; otherwise it can cause major problems in trying to conduct a settlement transaction.
An agent should also read through the documents to learn exactly how the transaction or repaying the loan should work out, which can sometimes be difficult in and of itself, he added.
“It should be spelled out in the documents, but it might take a few read-throughs to understand exactly how it will work,” he said.
Because a life settlement transaction by itself can take 3 to 4 months, Pryor said agents should give themselves at least that amount of time before the financing “deadline” to consider a possible life settlement.
“Because you’re up against a deadline,” he explained, “you don’t have the luxury of going back to get something you forgot.”
Those agents who don’t, he cautioned will find themselves with very little room to maneuver.
“We’ve had folks come in two weeks before the deadline,” he said. “It makes it really difficult and limits your options. You basically can only go to the program and ask for extensions, and they don’t have to give it to you.”
One potential pitfall that agents should avoid, he said, is simply going back to the entity that financed the initial policy. While those entities offering the premium financing may be more than willing to purchase the policy, they may not be offering the best price. “You’re better off getting that out to a broker that knows the ins and outs of the different funders,” Finfer said.
The importance of seeking out a broker was emphasized by both Finfer and Pryor, and although noting that it would certainly be helpful to them, they both also pointed out that the complexities of bringing a premium-financed policy to the secondary market make a level of expertise all the more necessary.
Premium-financed policies are not facing the same market as more traditional life settlements, Pryor explained. “Not all life settlement buyers are buying premium-financed policies,” he said. “Many don’t buy them as a matter of policy” he added, citing the reason for most as “conservatism.”