Premium Finance/Life Settlement Expert Discussion

[Omni]

Hello and thank you for viewing this topic. After frequenting this messageboard for the past several months I have decided to start a topic related to the areas of business that I specialize in...premium finance, life settlements, and other advanced strategies for seniors.

The firm I work for has been in this industry for years and we truly are experts. If you have any questions or comments regarding premium finance, life settlements, how to leverage insurable capacity, etc...please post them here and I will answer all of your questions. Thanks again and I am looking forward to a great conversation.

 

[Guest]

Interesting that this thread comes up now as one of the GAs I know told me that some major banks are looking to get into the financing of these these things for high net-worth people. They see premium financing as a way for these people to get into bigger (million +) for far less capital outlay.

The other side is that this is a way for low net-worth people to get into a policy they can't afford... not much different than sub-prime home loans. Since the real estate boat has sailed bankers are looking for ways to sell money. One of them will be reverse mortgages. Well Fargo is getting into that big-time, so I'm told.

How do you collateralize or secure these P-F loans?

Al

 

[Mr. Bill]

Wells Fargo has been doing reverse mortages quite a while (as long as I can remember). You, and your client, must absolutely positively understand the implications of the reverse before pursuing, it's really not suitable in many cases yet a commission hungry mortage agent will SAY ANYTHING!

With respect to premium financing, let's not forget how the banks get paid. My understanding is that if it is entirely financed, the bank will get 20-40% of the insurance commission up front (meaning, it comes from the agent's commission) and yet if the client has a way of financing directly for at least the first 2 years, that doesn't happen.

With the premium financing arrangements, they will work very well if the client doesn't live too long. But just like a reverse mortgage, the interest costs will eat up the policy exponentially over longer periods of time, especially if the product doesn't "perform".

While I have my opinions, I appreciate others telling me where I may be off the mark, so have at it!

 

[lifesettlementadvisor]

Premium Finance programs have little to no out of pocket cost to the client. Also the interest doesn't eat up the death benefit. Doing a finance for life program is a great option for a client that wants to make a large donation to their favorite charity or church. The charity will receive this large donation after the client dies, at the same time, the client is giving a great benefit to the organization with no cost to themselves. Yes, the agent does loose a portion of their commission, but this is usually on a large policy that would not be selling without the PF program.

 

[Mr. Bill]

I didn't mean interest only, I meant interest plus premiums - it has to eat up the death benefit - how could it not? Especially in down years in the market. Where am I wrong? Thanks

 

[Charpress]

The trick is to have a policy large enough to cover the expenses and still net out to the amount of coverage needed. So, if you needed $10 million to cover death taxes, for example, you might have to purchase a $13 million policy -depending on many factors, especially the insured's age.

 

[Omni]

Interesting that this thread comes up now as one of the GAs I know told me that some major banks are looking to get into the financing of these these things for high net-worth people. They see premium financing as a way for these people to get into bigger (million +) for far less capital outlay.

The other side is that this is a way for low net-worth people to get into a policy they can't afford... not much different than sub-prime home loans. Since the real estate boat has sailed bankers are looking for ways to sell money. One of them will be reverse mortgages. Well Fargo is getting into that big-time, so I'm told.

How do you collateralize or secure these P-F loans?

Al

Al, thank you for your response. You are correct in your assessment. This has actually been going on for a lot longer than most people know. Some lenders allow just the policy as collateral and others require 100% collateralization. This means that whatever the margin is between the cash surrender value and accrued loan is what the borrower has to post up as collateral in the form of an LOC, cash or securities (2 to 1). This is really dependent on the insured's life expectancy, the premium amount, etc. which will all determine the value of the actual policy in the secondary market. Thank you for your post.

 

[Omni]

I appreciate everyone's input, but want to clarify how premium finance really works. Yes, some premium finance deals require the agent to split commissions, but then again, this is really not about the agent, it's about the client and their needs. And in most cases the agent would not even have a deal to work with if it weren't for financing the policy. So that is not really a point to focus in on.

With that being said, yes the longer an insured lives the less the "net death benefit" will be. As more premiums are paid each year and interest accrues the accrued loan amount will get higher every year, every day actually. So, that is a correct assessment of how premium finance works. Further, there is up front out of pocket expense in some programs. For full recourse you have the cost for the LOC and may have to post up collateral, whereas other programs all of the expenses are "rolled" into the loan, but they are still expenses that eventually come out of their pocket.

You can definitely calculate the amount of death benefit needed with rolling interest charges in, etc. by using a premium finance illustration. This can help you determine what the net death benefit will be in any given year. If you go off of the insured's life expectancy then you can very easily calculate how much coverage you need to get the amount of net DB desired. But, again if the insured lives longer then the predicted life expectancy, then it will result in a lower net death benefit. If there are any questions, feel free to ask. Thank you for all of your posts.

 

[Omni]

Has anyone on the board ever transacted or been approached with interest to a life settlement deal?

 

[JRoot]

I've been involved in 2 life settlements. With the help of another agent since I'm still new at it. One funded, one didn't.

The one that didn't fund was a Northwestern Mutual policy. They aren't allowed to broker these deals, so an agent came to me to act as the broker and shop it around. It didn't fund because it was a term policy with a $750k db and NMFN doesn't have a UL for less than 1mm and no one would buy it. His LE was a little high also.

I'm trying to do more of these actually. Good commish and good for the client.