When the life insurance premium finance market blossomed around 2001, many saw this as a sales opportunity with a relatively short life span. We had just experienced five years with double-digit growth in the S&P, and LIBOR based borrowing rates had recently dropped to below 3 percent.
With traditional, company approved premium financing, the concept was based on the simple arbitrage between the borrowing rate and the crediting on UL policies, which was based on life company portfolio returns and was around 7 percent in 2001. All who stood to benefit — agents, attorneys, life insurance companies and lenders — were eager to market this new concept to high-net worth clients.
I had just left one of the nation’s largest life insurance companies, where I’d served as the UL product manager, and joined another division to help run their newly formed life insurance premium finance company. The lender and life company both grew their respective businesses, but I don’t think the corporate parent saw this as anything more than moving money from the right pocket to the left, and decided to sell off the finance company.
What followed was an interesting period with a number of large international banks bidding for the business, and our management team working with several entities to structure a possible buy-out or establish a new entity elsewhere. A big bank eventually won (they usually do) and I joined them for a while before going out into the field.
The years that followed were wild, with large banks taking fresh interest in the life insurance business. These companies were eager to provide funds to lenders and structures that capitalized on the projected returns in the senior market. During this period, I enjoyed trips to Las Vegas, Europe, the Caribbean and Latin America to design structures. I got to meet many successful agents and their clients. It was a wild ride.
But of course, after the party usually comes the hangover, and it often lasts twice as long as the good time that lead up to it. Consider that the Great Depression followed the roaring ‘20s, the dot.com crash followed the boom in the late ‘80s and early ‘90s, and it really should have come as no surprise that the roaring 2000s would lead up to where we are now: A stalled economy with little growth and much uncertainty.
Many of the people I worked with on the financing side back then are now scattered around the world pursuing other adventures and opportunities. Others still work in this space. Unfortunately, a few are working to repair damaged reputations due to charges and allegations resulting from deals that went wrong.
Although many feared that after 2008 the demand for premium financing would end, that is definitely not the case.
Today we again see low interest rates and markets near historic highs. And based on discussions with lenders, we have seen robust premium finance sales that have increased steadily since the credit crunch of 2007-2008. Some still see this as a result of financed policy projections based on today’s borrowing rates, which continue to remain much lower than what many of us projected on our sales proposals generated since 2001, and higher life insurance illustrated rates. Sure we now use IUL to present the concept to clients, due to current UL credited rates. But the pitch is still the same for many. Arbitrage.
Agents, attorneys, life insurance companies and lenders are still enjoying the party. Or are they? Maybe the exuberance is not a result of continuing to drink a punch that we all know will eventually lead to no good. Maybe they are benefiting from well-designed financial plans. Is that possible?
For those who are students of the premium finance market, we know that some industry pundits have been very critical of the concept. Some of the criticism is justified. I don’t subscribe to the idea that premium financing should be seen as a marketing concept used simply to sell large life insurance policies. Agents and clients that I have had the pleasure of working with know I frequently state that premium financing is not a reason to purchase a policy; it is nothing more than a way to pay for one.
Often it is the case that the agent has identified a legitimate need, whether it is for estate or business planning, and the client is unwilling to write the check. If a client is willing to write the check, take it. Do not overcomplicate the sales process unnecessarily.
Other times, the client needs a little push. Those of us who have been in the business long enough know that you never meet a beneficiary who is upset that you convinced a deceased client to purchase a policy. We also know that an efficiently priced policy usually provides an internal rate of return of 3-5 percent around life expectancy. No one should feel guilty for introducing a financing strategy that appeals to the client’s sense of greed by allowing him or her to invest in some other asset, often a personal business, because the client does not fully appreciate the need for the death benefit, or the fact that purchasing the policy that protects against a potential loss is not as desirable as investing into the alternative asset.
Those of us with a conscience can sleep well at night knowing the risk has been insured and we used a well-designed strategy to fund the policy. A well-designed strategy can only be created after the review of a personal financial statement. The agent needs to be certain the client has the liquidity to tolerate deviations from collateral projections on a conservatively prepared loan projection.
For individuals with sufficient liquidity, premium financing continues to be, and will always be, a cost effective way to fund a policy.