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.