Understanding the Flaws in a Premium Financing Policy

April 16th, 2019 No comments
Convince a client without opening your mouth.

At the courthouse, the judge looked to the other guy and asked his story. After hearing the guy’s side, the judge ruled in my favor. I never opened my mouth. You can imagine how ridiculous the situation was when I didn’t even have to present my side of the story.

I’ve written at length about how little the typical consumer understands about premium financing. A part of my job has been to vet deals and fix problems. But even I was surprised earlier today when I had a scheduled phone call with a client who retained me to review his deal.

The phone call consisted of the insured individual, the premium finance guys, myself and my associate. In a way, the client was the judge, and respectively, the agent and I were the defendant and plaintiff, though I didn’t mean for it to be adversarial. That being said, I didn’t think it was a good idea for the client to move forward based on what I understood as his goals relative to what I was seeing. All I proposed to do was to bring objective information to the table.

This wasn’t an initial call to discuss the deal with the client. This transaction had been going on for over a year, and the client and his wife were fully underwritten and ready to go. I was brought in at the last minute. When I asked the client where he wanted to start, he said he wanted to give the other guys a chance to “defend” themselves regarding the points my associate and I had brought up. A few minutes into the conversation, the client stopped them and said it wasn’t what he understood and closed it down. I never opened my mouth. All the data and support material I had lined up was for naught. We never discussed it.

A Change of Heart

What made it turn so quickly? It wasn’t the sensitive nature of the indexed universal life contract that was illustrated too aggressively for my taste. It wasn’t that the illustrated financing rates were too conservative in my opinion. It was that the client had a fundamental misunderstanding of the risk and what was on the line. He didn’t even know he had to put up substantial collateral for the financing. He thought there was actually no risk besides a few out-of-pocket interest payments. This is so shocking, it belies belief.

I’d run multiple alternate scenarios to show how sensitive the contract was to minute changes in assumed interest. I’d explain how the illustrated interest rate wasn’t as conservative as he thought because the index rate doesn’t incorporate dividends. I used third-party tools to put the assumed policy return into context. I’d performed independent modeling to show the marginal likelihood of the policy panning out over time in a stock market with a variance in returns that couldn’t be illustrated by the insurance company. I’d calculated how a reduction in crediting rate for the policy would manifest itself by a 300 percent reduction in policy values due to policy costs and expenses.

I’d created my own spreadsheet like the client had been originally presented but added a column showing the policy loan (at a conservative rate though the loan rate was variable) that I don’t think the client even knew would exist. I was going to show how borrowing and collateralizing $14 million plus accruing interest from a bank to buy $20 million of insurance was pinning hopes on the policy performing well enough over 20 years to pay back a $27 million loan to the bank through a loan from the life insurance policy. I planned on showing how that policy loan would grow multiple fold on its way to $80 million by age 100, even if the low variable policy loan rates never changed. I wanted to point out that at actuarial life expectancy, when the loan was $50 million the net policy death benefit to his family was projected to be $10 million. I intended to show a ledger at what I considered to be more reasonable crediting assumptions that showed the entire deal was likely unsustainable and would collapse. I was going to explain that if things went sideways there would be tax at ordinary rates on tens of millions of dollars of phantom gain.

But I didn’t get to.  The judge ruled in my favor without me opening my mouth.

Bill Boersma is a CLU, AEP and LIC.  More information can be found at www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info and www.XpertLifeInsAdvice.com or email at bill@oc-lic.com.

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Premium Financing is Great… Except When It Isn’t

April 10th, 2019 No comments

Digging into the numbers is exceedingly important.

More and more premium finance deals and proposals are making their way to my desk. Most have some common characteristics. First, they probably aren’t going to work, and second, consumers don’t understand them. When I say “don’t understand,” I don’t mean they simply don’t understand the details but that they have a misunderstanding of how the transactions will play out.

I’m a proponent of premium financing, when it’s done right and for the right reasons. Real-estate owners and developers have used OPM (other people’s money) very effectively because they’re often able to prove mathematically that the leverage makes sense. I’m doing the same thing when I don’t pay off my low interest home mortgage and keep my money in the market. However, when it comes to financing life insurance, I have an issue with much of what I see out there. First of all, I firmly believe that finance deals built around the arbitrage For full post, click here…

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Vetting a Premium Finance Deal

February 25th, 2019 No comments

A family office called me in to review and analyze a proposed premium finance deal. After gathering the details of what the family was trying to accomplish and requesting presentation materials, insurance ledgers and financing term sheets, I dove into it.

The advisors let me know that one of the primary things they wanted to understand was what their “bail out” option would be in 10 years. In other words, they wanted to understand their options in a worst case scenario, which is an important thing to get one’s arms around.

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This plan was built around a 10 pay whole life contract and the collateral for the policy was to be an existing whole life contract on the same individual, the matriarch of the family. A part of my analysis was a historic comparison of whole life dividend, and how they move in relation to the interest rate markets, to LIBOR rates. An important and revealing aspect of this for the advisors was how the policy dividends really work and how they are applied. For full post, click here…

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Is Association Term Insurance Really a Good Deal?

February 20th, 2019 No comments

Young professionals don’t stay young forever.

If your client is in his 20s and is a young lawyer, accountant, doctor or member of any association, he’s no doubt been offered the opportunity to purchase inexpensive term insurance through his association. He gets all the benefits of easy enrollment and no lengthy forms nor medical questionnaires to complete. He may not even have to pay a bill as everything might be done electronically through his payroll department. Then, to top it all off, he receives a dividend/refund check making the price even lower. He’s convinced association term life insurance is the best and only way he should ever buy term insurance for his family—after all, the members of his profession are clearly a better risk than the public at large. The only problem is those automatic five-year increases become very expensive once he hits age 40.

For full post, click here…

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Testing and Modeling Life Insurance by Bill Boersma & Marty Shenkman

February 12th, 2019 No comments

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Life Insurance Reviews Don’t Always End in Disappointment

February 7th, 2019 No comments

Just as with routine physicals, a “well visit” can identify opportunity.

Sometimes I think my job is basically giving people bad news. As a consultant, yes, I see more than my fair share of sick policies just as the number of patients that come through a doctor’s office in the course of a day who are sick is likely greater than the population at large. Sick people congregate at the doctor’s office and sick policies congregate on my desk.

The main issue with educating the advisor market on sending sick policies to me is that they don’t always send policies to me that aren’t obviously sick. Often times, sick policies don’t look sick and when one waits long enough to see the sick, they’re terminal. Hey, just like with people.   For full post, click here…

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What kind of life insurance should I buy? – by Bill Boersma & Marty Shenkman

January 22nd, 2019 No comments

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Life Insurance Survey by Bill Boersma & Henry Montag

January 8th, 2019 No comments

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When Is Whole Life Not Really Whole Life?

January 7th, 2019 No comments

Whole life insurance has been held up as somewhat holy and unaffected by the travails of universal life insurance. This has got to stop.

Over the years, there’ve been innumerable pieces written on the failings of universal life insurance. However, if consumers paid attention when these products were explained to them, they’d be no more surprised by this when discovering their retirement plans weren’t going to pan out when they experienced only half the expected market return. None of this should be a surprise; if projections aren’t realized, results will differ.

That being said, there’s little discussion about the failings of whole life insurance. Now, when I say WL, I mean actual WL and not just permanent cash value life insurance. Somehow, WL has been held up as somewhat holy and unaffected by the travails of UL. This has got to stop because many policyowners and their policies are suffering for it. For full post, click here…

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Giving Life Insurance to Charity by Bill Boersma & Marty Shenkman

January 2nd, 2019 No comments

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