Jun 20
Non-Recourse Premium Financing… a “Win Win Win” … Hardly!
One of the “hottest” concepts in the life insurance business today is the Non Recourse Premium Financing arena. Hundreds of millions of dollars of life insurance premiums are being written in it. And while it is fraught with serious problems, there doesn’t seem to be any way to stem the growth of these, often questionable, transactions.
The New York Department of Insurance recently issued a statement of position on these transactions. In no uncertain terms, the Office of General Counsel of the New York Insurance department determined that many of these transactions are NOT permissible under New York law. That’s because they violate New York’s insurable-interest regulations. Insurable-interest laws are intended to prevent people from gambling on the lives of strangers and profiting from their deaths.
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June 24th, 2006 at 1:45 pm
In the above referenced synopsis on “Non Recourse Premium Financing”, several issues need to be addressed.
1. Non Recourse Premium Financing is a thing of the past. I am not aware of any insurance company that will accept business with financing of this type. Applications have been amended to detect these arrangements, inspections are now looking for signs of non recourse deals and carriers are beginning to interview insured’s.
2. The regulatory agencies, some state departments of insurance, carriers, re-insurers and credible agents have indeed stemmed the growth and use of this type of financing.
3. Not all agents sold insurance and paid the insured; those were exceptions, not the rule, and those practices were reprehensible.
4. Premium Financing with recourse is alive and well. There are right ways and wrong ways to finance life insurance policies and wealthy consumers buying large amounts of life insurance should ALWAYS consider financing their premium payments.
5. Carriers do not object to properly structured premium finance programs, that are rooted in legitimate needs for life insurance and where the origination is not, in any way, connected to the settlement of the policy.
June 26th, 2006 at 9:44 am
Thanks for your comments Ted. While many carriers are in fact making efforts to curtail or eliminate this business, others are not. The fact is, at any given time, certain carriers and/or the executives that run them (whose compensation is often based on short term premium growth) are hungry for premium and as such turn a blind eye to schemes like this which are bad for the carrier in the long run.
Certainly there’s been some activity on the regulatory front, most notably in New York. And this regulatory activity has slowed this practice somewhat. But it is still happening. The promoters are great spin masters and have pumped out volumes of propaganda to create a smoke screen around what’s happening.
There is some truth to your 3rd point, in that many of the non-recourse deals did not involve up-front payments. However, in virtually every case, the prospect of making money on the back end (after the two year period) by “shopping” the policy in the secondary market and selling it for more than the outstanding loan and expenses was discussed and was, almost always, a selling point that was used a sweetener to the deal. Bottom line, up front, or back end, the insureds on these deals were almost always promised something beyond two years of “free insurance”.
Premium financing with recourse IS alive and well. And YES, there are indeed right ways and wrong ways to finance life insurance policies. I agree that wealthy consumers buying large amounts of life insurance should consider financing their premium payments.
I also agree with your 5th point – carriers do not object to properly structured premium finance programs that are rooted in legitimate needs for life insurance. However, one problem continues to be the difficulty (or lack of willingness) of the carriers to distinguish between these legitimately structured deals with the appropriate objectives, and those deals that are designed from inception to end up in the hands of a person or entity with no insurable interest in the insured.
June 26th, 2006 at 10:38 pm
Mr. Udell, your comments are all well taken. My point for responding to your initial thoughts was an attempt to have your readers realize there are options available to them from credible, experienced insurance professionals. The aftermath of the non recourse “rush” can oftentimes be described as throwing the baby out with the bath water. Our organization has been counseling consumers on premium payment financing for quite some time now. It is my belief that any connection between loan origination and the settlement of the policy (no matter how “loose”) is a structure the carriers are determined to quash. Premium financing is not and should not be used to create inventory for the settlement industry.
With that being said, I have a great deal of faith that financing plans with well thought out, transparent structures will attract sophisticated consumers with significant insurance needs. Commissions in these programs can pay agents well into the six figures and provide great rewards for exposing financed life insurance to their clients.
June 28th, 2006 at 8:19 am
There is an effort on the part of some carriers to try and squash the practice, but unfortunately, others (with a short term perspective) will continue to entertain this practice, albeit financial imprudent for them in the long term.
I agree that premium financing in not and should not be used to create inventory for the settlement industry. However, clearly that is exactly what has been happening, driven in large part by the leaders of the settlement industry. These “leaders” have, as you well know, crafted programs that, in addition to creating inventory for the settlement industry, cut themselves in on the life commissions.
Bottom line: lots of money has been made, and no one that’s making those large sums wants it to stop.
July 2nd, 2006 at 12:31 pm
Yes, the “leaders” of the settlement industry can oftentimes be described as the fox guarding the hen-house. It is hard to determine what their motivations are. Many talk about the insurance industry in very disparaging terms and it makes you wonder if they really don’t understand the source of their product. Structure, transparency and regulation will be welcome to most over the next several years.
Included in those that are making large sums of money from what has been going in the non recourse market have been carriers. Time will tell which ones, if any, will permanently refuse to take premium financed business in the over 70 market; of any kind. My guess is no. And I applaud those that have stepped back and reconsidered how to re-enter with clearer guidelines of what they want and don’t want.
July 23rd, 2006 at 1:57 pm
Hello there,
I have been working in the insurance industry for about 10 months now. A friend of mine has been talking about this idea of selling insurance. It sounded kind of fishy so I started doing some homework on it. In the end, I am just trying to understand how the carrier actually loses. If they are going to get paid the same premiums regardless and are going to have to pay out the same death benefit, how are they affected? I understand that the thought that some corporation is out there making money off other peoples lives is not a comfortable though to say the least, but where is the financial loss? I see on applications where you have to ask about the policy being affiliated with a bank and so on so I am not arguing whether it is damaging the insurance industry, I am just trying to FULLY understand the whole idea.
Thank you
July 26th, 2006 at 1:18 pm
The carrier loses two ways.
First, in pricing their products, all carriers assume that a certain percentage of the policies issued will lapse for various reasons each year. These lapses actually contribute to profitability and affect the products’ pricing. If all insurance issued stayed in force until the death of the insured, life insurance would be much more costly. If one could isolate the block of business owned by strangers as a speculative venture… a block of business that almost never lapses as its premiums are paid religiously, clearly this block would be unprofitable.
Second, in the non-recourse premium financing arena, the policies are being issued from the onset with the intention on the part of all parties that the policy will, within a few years, end up in the hands of speculators. These deals are carefully scrutinized, in advance, by these “investor groups” and their experts. And the fact is, these deals don’t done unless the insurance carrier makes an aggressive offer, i.e. an offer that one could argue was too good. These investor groups are presented with dozens of willing participants who go through underwriting. They wait until they find an “overlay” (a term that gamblers use to denote a good bet). When they are presented with an individual that should be a Table B risk, and they find an insurance company willing to issue it on a Preferred basis, they buy all they can get. It’s arbitrage, pure and simple.
Among those that are fully informed, and understand the nature of these transactions, it is well accepted that these deals represent a negative force on the insurance industry. Of course everyone else (the agent, insured, settlement firms, finance companies) involved is making a fortune putting these deals together.
February 26th, 2007 at 11:09 pm
I have been offered the possibility of purchasing a non-recourse policy with the promise of making 30% of the face value at the end of the program term (2 years). Is it true that I will owe no money other than taxes on the money I make?
February 27th, 2007 at 9:22 am
Without more details on the program you are reviewing, there is no way to know what, if anything you will \”owe\”. However, a few things are quite clear. Approximately two years from the inception of the policy, unless you are prepared to come up with a large sum of money to pay off the loan, you will end up transferring ownership of the policy to someone else. You may or may not recieve ANY money for doing so. No one knows for sure what the secondary market will deliver two years from now on your policy. Whether or not you make a profit, in two years, a stranger will now own your policy and will stand to gain a LARGE sum of money as soon as you die. This \”stranger\” may sell your policy to another stranger (might even be Tony Soprano), who will also stand to win big (millions?) the moment you die. In the meantime, that stranger will have to pay large premiums INTO the policy, while he waits (patiently?) for you to die. If you don\’t mind looking over your shoulder for the rest of your life, wondering who wants you dead, and what they might do to help you along toward that end, you might be a perfect candidate for one of these nauseating programs that speculate on human life. Think about all the murders in the history of mankind that have taken place with money as the motive. Most of them, with a small fraction of the amount of money at stake than on these non-recourse, stranger-initiated life deals. I, personally, have been recommending that our clients, friends, and family stay as far away from these deals as possible.
March 2nd, 2007 at 8:17 pm
We attended a presentation by Imperial Finance & Trading yesterday. Their pitch was that we can get $1,000,000 life insurance policy that will cost us nothing, it will be put into an irrevocable insurance trust. They will pay all of the costs of setting up the trust and for a lawyer to be the trustee of the trust. They will provide the financing for the premiums at an interest rate of LIBOR + 4.5%. They claim it will cost us nothing and we will never have any financial liability. They look for us to sell the policy once 2 years have passed and said that they expect to get about 25% of face value for the policy or $250,000. The 2 years of premiums and the accumulated interest are to be paid first out of the sale proceeds and we get the remainder (some $150,000) as a long term capital gain with a 15% tax rate. These guys told us that this approach is the entire business of their company and they travel around the country making these same sales presentations to high net worth individuals (over $1,000,000). They did say that not all of us would qualify, but they would put out inquiries to at least 17 Insurance companies to get bids for our insurance. They said that they have available buyers for the insurance at the end of the 2 years, however they implied that we would have a choice of whether or not to sell the policy. They claimed that if we did not choose to sell the policy, that they would continue to pay the premiums with absolutely no financial exposure to us for those premiums.
March 5th, 2007 at 10:14 am
Dick -
Unless you\’re OK with a total stranger owning life insurance on your life (two years from now, after you sell it), and knowing that a 3rd party (who could be Tony Soprano or someone like him) will collect millions when you die, and who will patiently pay tens of thousands of dollars per year until you do, you\’d be OUT OF YOUR MIND to sign up for this \”deal\”. Use your common sense. Do you really want a multi-million dollar bounty on your head? A multi-million dollar incentive for murder? I certainly don\’t. Nor would I allow anyone I know or care about to do it either. Remember, once you sell your policy, it can be resold without your knowledge and/or consent. You will have no control over who might end up owning it.
August 8th, 2007 at 11:05 pm
Isn\’t it true that Wall Street firms are buying these policies? Is it realistic to thing that these companies would sell these policies to Tony Soprano types? I reference the Business Week Magazine cover story below.
http://www.businessweek.com/magazine/content/07_31/b4044001.htm?chan=top+news_top+news+index_top+story
August 9th, 2007 at 9:43 am
Yes. It is inevitable, in my judgment, that some of these policies will eventually fall into the wrong hands. It is against public policy, and against the law in every state to OBTAIN a policy on someone that you have no insurable interest in, for obvious reasons. Why should it be any different to OWN a policy on someone that you have no insurable interest in? While it\’s not against the law, it is just as dangerous a practice.
September 27th, 2007 at 4:16 pm
Hello Everyone,
The fact is, lapse rates are 80% on UL policies and 95% on term. So to say that Prem Fi is going to affect the pricing of the policies is rediculous. 2% of insurance is held by people over 70 anyway. Infact you will find some carriers will look the other way with PF policies for the reason that the time value of money is far greater benefit to the carrier. If you own an insurance policy, your really just a cheap loan to them anyway. I think it\’s wonderful that healhty older folks can generate income from this. It\’s like a bonus for taking care of yourself all these years. Besides, their long term care plans are overpriced as is their senior living. Nursing homes? a joke! and to address the fool above with the SOLI concept…get out of the insurance biz…more wives have killed their husbands for their insurance than anything else. I think their is a better argument to brokers who transact it who simply suck at what they do. I am a broker for this and I give the insured what I tell them. Their is no promise after 2 years…it\’s speculative. But…a life expectancy report today can assess your chances of making a good deal. If you have interest in making a good deal and want to talk to someone that actually knows how to construct a deal like this simply email me. I am lisc\’d in 48 states.
MJGUSA1@hotmail.com
September 27th, 2007 at 4:36 pm
I am active in the business and am familiar with the Imperial deal that Dick discussed. Their are many deals out there that do offer seniors the potential of a great return but not all seniors will qualify. Also we have programs that benefit seniors much sooner rather than after 2 years. My website–www.sonnyartusa.com has further details of all we do and to answer any questions you may have.
December 25th, 2007 at 11:57 am
PLEASE HELP ME!!!
My elderly parents are involved in a non recourse premium finance insurance \’scheme\’. The advisor promised them $40,000 up front. However, they have very little net worth and I was fed-exed a 30 page confusing legal document, whick I was told I had to sign in numerous places,which according to the financial advisor was required to be mailed back the next day.He balked when I informed him I need a lawyer to review it and gave me vague answers when I asked why I,as their daughter have to sign it at all.Meanwhile, my parents are in a frenzy that they lost an opportunity to get $40,000.
I would great appreciate any advice as to what the risks are to my parents , as well as myself.
Thank you so much,
J
March 6th, 2008 at 2:07 pm
Dear J
I would welcome the chance to help you in the situation you described. It is important to know that the situation must include a Irrevocable Life Insurance Trust as this will elimate any potential tax implications in the future. That is the key, their financial status must be truthful as some advisors attempt to overstate financials in order to receive large amounts of life insurance. If you need any help: