Non-recourse premium financing for in-force policies an alternative to surrender for older clients
Unexpected cost of living increases affect people of all walks of life. Even the best-laid plans are not foolproof. There are unforeseen circumstances that cannot be avoided. Unanticipated costs can burden even the largest budget.
The Wall Street Journal recently reported a number of life insurance companies that are increasing the cost of insurance. This is proving to be challenging. Even high net worth individuals are not immune and are looking at their options. Those especially vulnerable are senior citizens.
Having already invested for years in their policy, continuing to pay premiums may seem like the only choice. One problem is that this may not be the only increase. As the costs continue to rise, the burden can become overwhelming to a point where the policy owner chooses to surrender the policy. Too often a lapsed policy is the result of a lack of information. By not knowing every option that is available to policy owners, often they are losing money.
With over $112 billion annually in life insurance policy lapses and surrenders for clients 65 and older, approximately $57 billion (250,000 policies) could have beenfinanced on the secondary market. Lapses and surrenders happen all to often because of a lack of awareness of the secondary market by agents, brokers, and consumers.
Life insurance professionals often prepare for increased costs through the cash value in the policy. Unfortunately, eating up the cash value and/or reducing the death benefit is a short-term fix that may not provide a palatable long-term solution. What happens when there is no longer any cash remaining? Or, the death benefit has been reduced to the point where it is costing more to keep it in force than what it is worth?
Many policyholders do not realize they may have the option of selling the policy. Contingent on the circumstances, there may be a return on investment. This is dependent on the value, including the age and health of the insured. If the client is young and healthy, selling the policy will not be feasible. Even in the best-case scenario, it is a buyer’s market with investors expecting annual returns of up to 20%.
The advantage of selling the policy rather than letting it lapse or for its surrender value is getting something more in return rather than nothing, or a small fraction of the death benefit. The reward is immediate cash. The drawback is losing the death and tax benefit and the entire reason for investing in life insurance in the first place.
There is another alternative. This alternative allows the policy owner to keep the policy in force. They continue to receive the death and tax benefit. It also provides them with added flexibility without compromising their lifestyle. Seniors finance their house, their boat, their plane, and other large items, so why not finance their premiums?
Unlike traditional premium financing, this new non-recourse premium financing is for in-force policies – not new ones. By utilizing the policy as the only collateral, unlike traditional lenders, there is no need to borrow against additional assets. Without any negative ramifications, the policy owner preserves their cash liquidity.
Such was the case with an older affluent individual with a multi-million dollar policy. Understanding the leverage of borrowing future premiums, they were able to secure financing for 10 years with little out-of-pocket cost. The savings afforded them the investment opportunity that they put into additional annuities without compromising their lifestyle. The policy owner, like so many others, had very little cash value left in the policy and thought the only option was to surrender the policy.
With the continued increase in the cost of insurance and clients only getting older, this new non-recourse premium financing option in the next couple of years will bring enormous growth opportunities. Life insurance professionals will also reap the benefit of keeping more of their clients, and in doing so, have exponentially more money making opportunities.
• Are you familiar with this strategy and if so, have you used it? Please comment on this thread: Non-recourse premium financing strategy
- 2016 FMO Executive Outlook, Part I: The M&A climate, planning for the DOL Fiduciary Rule, other key challenges
- Prudential restructures U.S. life and annuity business in effort to expand customer value proposition
- What it takes to be an ‘Agent for the Future’
- Next wave of fee-based FIAs hit the market
- 4 Real Life Stories: Life Happens honors agents for exhibiting outstanding client service
- Optional benefits: Changing a ‘no’ to a ‘yes’
- U.S. life and health direct premiums expected to decline for the first time in 4 years
- New study provides insight into benefits challenges facing HR professionals