Premium financing can be a legitimate tool for buying life insurance, but carriers should take a careful look at it during the underwriting process.

Several speakers made that case here at a reinsurance conference organized by the American Council of Life Insurers, Washington and the Society of Actuaries, Schaumburg, Ill.

“I am a supporter of good, quality premium financing for the right client,” said Mike Bell, executive vice president of the life insurance division of Pacific Life Insurance Company, Newport Beach, Calif.

But he said it is important to see whether an applicant is using “true premium financing,” rather than simply creating a life insurance policy that will be sold through the life settlement market, by determining whether a lender is making money by keeping the policy in force and whether the lender has the right to sell a contract.

James Davis, vice president-underwriting at Phoenix Life Insurance Company, Enfield, Conn., agreed on the importance of understanding how an applicant and a lender are using premium financing.

“You have to look at who is paid and how much is paid and to whom,” Davis said. “It is absolutely a challenge…. It is just very difficult to sort out what business is [good] and what isn’t.”

To detect signs of use of premium financing, Davis checks to see whether the contract holder is age 70 or over and whether a large percentage of the total premium appears to come from a loan rather than from net income or net worth. If the applicant does not state current income in the application, Phoenix declines the application, Davis said.

Size can be another clue.

In the past, Davis said, premium financing firms focused on contracts with face values of $5 million to $10 million. Now he sees the firms financing contracts worth as little as $1 million.

Other ways to ferret out unwelcome use of premium financing include asking questions and talking to the carrier’s service department to see whether the customers of certain producers ask certain types of questions, according to Kenneth Conners, chief underwriting officer at Transamerica Reinsurance, Charlotte, N.C.

Understanding producer and customer behavior patterns can be helpful, Conners said.

If, for example, a producer who has no history of charitable giving starts a charitable program, that could be a sign of a problem, Conners said.

Also at the reinsurance conference:

- Jessica Bibliowicz, chairman of National Financial Partners Corp., New York, reported that her company has set up a premium financing data bank. Premium financing firms could use the data bank to understand carrier requirements, Bibliowicz said.

- David O’Maley, chairman of Ohio National Life Insurance Company, Cincinnati, said he believes premium financing is mostly promoted by agents rather than requested by consumers. Agents “are driving money through the front door, taking a piece of it as it goes through, and it doesn’t necessarily have to make sense,” O’Maley said.

- Bill Moore, chief underwriter in the Armonk, N.Y., office of Swiss Re, said he thinks most premium financing arrangements are designed to create business that later can be settled.