Premium financing helps facilitate “big” or “jumbo” sales. But like any powerful tool, it has to be used appropriately and with careful preparation.
The close case definition of a big or jumbo case may vary, but if a policy must be financed, most premium finance lenders will set a minimum annual funding limit of $100,000. For the purposes of this article, let’s use $500,000 of annual funded premium as the benchmark. Assisting clients at this premium level and with the application of premium financing requires a careful and thoughtful approach. No detail should go unchecked.
Let’s start with some basic steps:
» Using premium financing as the primary sales “igniter” for large cases may cause difficulties. You should recommend life insurance for well-established planning needs. The discussion of financing should evolve as the case develops. Placing financing as a means to an end can distort the client’s expectations of the costs associated with a complex transaction. Of course, avoid the dreaded “free insurance” pitch – there is no such thing as free insurance.
» Do not go solo when working on more complex cases. The use of financing increases the case’s complexity and risk. The client should have the proper advice and counsel from varied practitioners to assist with due diligence and accounting for the client’s end-state planning objectives.
» Compare and contrast different methods of facilitating premium payments, which, at a minimum, should include full out-of-pocket with no financing, partial financing with some premium paid out-of-pocket, or the majority of premium and costs financed. With all factors remaining equal, the two most affected variables between these scenarios will be the loan balance and collateral. The client should be briefed fully on the differences, and the client’s financial condition (current and anticipated) should be more than sufficient to meet the loan obligation.
» Consult the client about the projected collateral requirements of the loan. Stress test any financial (loan) model via rising interest rates and varying life policy performance. This process is particularly important when recommending indexed universal life insurance. Too often, clients expect the life policy cash surrender value to collateralize the premium finance transaction entirely without understanding the inherent long-term variation in policy performance and other variables.
» Develop a plan, work as a team and have a shared objective. Large premium finance cases require an organized process. Information sharing is critical. Always have planned, preagreed-upon exit strategies.
» Differences exist between lenders, so do your best to examine the terms, conditions and pricing of the loan. Given the size of these loans, a difference of even 0.25 percent over time can make a substantial difference, all other factors being equal. Also, involve legal and accounting resources during the review.
In considering these earlier points, which are fundamental for every potential transaction, let’s highlight a few areas for which you may want to plan or at least keep in mind.
Collateral is often the most difficult aspect of the transaction to manage. The client’s personal financial statement will provide insight into assets and sources of liquidity.
Most premium finance lenders will place an emphasis on assets that are liquid and that can be secured properly. This usually entails separate agreements or processes that should be addressed early on.
Leaving details for later could delay the transaction or, worse, derail the loan because the lender determines the collateral to be unacceptable or determines that it cannot be secured contractually.
The majority of clients pursuing life insurance cases with $500,000 or more in premiums will be defined as high-net-worth individuals.
However, it is important to review (with other advisors) the source of that wealth and future projections. Regarding the collateral discussion, not all worth is created equal when it concerns premium finance.
If the prospective client already is highly leveraged, it may impair their ability to provide long-term collateral and/or decrease the probability of a prearranged exit strategy.
Large cases combined with premium finance entail a fair amount of documentation. Work closely with all advisors and with the lender to assemble the required documents for loan underwriting and to present a uniform, complete package.
It is very difficult to complete this part of the process with 100 percent accuracy, although getting close to 100 percent helps tremendously to move the transaction along in a steady and professional manner.
Work in concert with the issuing life insurance company, assigned sales area and the advanced markets team. Most large carriers have a distinct process for evaluating premium finance cases, so make sure early on that the lender is accepted and the particulars of the case meet designated standards.
Life insurance premium finance is an exciting and challenging area. Taking a careful step-by-step process can limit the inevitable difficulties you will encounter. Solid preparation and a detailed approach can help close that large case and pave the way for future success.