Selling insurance products can be difficult during good times and extremely challenging in recessionary times. In fact, recent industry studies revealed the current economy has taken a toll on the life insurance industry. The average case size has decreased. In addition, universal life sales (as a whole) have seen a large decline.
One market hit hard is the affluent. Few wealthy clients are now willing to write a big check for life insurance. Instead, they are holding liquid assets until more certainty with the economy occurs. For those affluent clients who understand the value of getting life insurance today–while they are insurable and rates are lower–many are turning to term instead of permanent life insurance.
Term insurance is better than completely foregoing coverage. Yet for many wealthy individuals, permanent coverage may be a better option to meet their needs. As an industry, we can become more innovative by helping our clients find ways to get the necessary permanent coverage. Now is the time to convey to affluent clients that permanent coverage could be their best option.
One option explored by producers for funding life insurance is premium financing. Generally, the technique is viewed and illustrated as a long-term solution for clients who lack liquidity. Most premium financing illustrations show loans of 10 years or more. These long-term illustrations usually cite death as a loan repayment strategy. This concept works on occasion, but the closing ratios are typically low for these cases.
To make things more difficult, many lenders have exited the premium financing market due to scarcity of capital. Remaining lenders have raised their lending rates and net worth requirements. However, that doesn’t mean you should forget about premium financing. It just means changing how you think about it. For instance, a concept that is rarely explored but still very viable is short-term premium financing. This strategy allows clients to retain their cash and liquid assets, while offering them the permanent coverage they need. The strategy has advantages and disadvantages (see chart).
Not a STOLI scheme
Legitimate short-term premium financing should not be confused with stranger-originated life insurance or STOLI, which calls for the client to pay off the note by transferring the policy to the lender. Legitimate short-term financing programs are done through banks and other lending institutions.
These institutions are in the business of lending money and being repaid in cash. They do not require life expectancy underwriting nor do they impose minimum age requirements. Full collateralization is required, often using cash or cash equivalents, along with the cash surrender value of the policy. The client’s objective is to purchase a policy to meet long-term planning needs. Let’s look at a recent case that used this strategy.
Real-life case study
At age 58, Michael T. has a net worth of $12 million. A year ago, Michael’s net worth was closer to $17 million. He owns a successful construction company in a Colorado resort community. In addition, Michael owns numerous commercial and residential rental properties in the western part of Colorado, a region where the gas and oil industry has been booming.
The economy has slowed. As a result, Michael’s construction business has come to a near standstill. Fortunately, his rentals continue to do well. Michael has accumulated nearly $2 million in cash and certificates of deposit. He is using this liquidity, plus the rental income, to keep his business as strong as possible. He wants to be ready to expand quickly once the economy improves. Michael’s three children assist in his construction business and the management of his rental properties. However, Michael owns 100% of all his businesses.