A premium finance program you must avoid

By Roccy Defrancesco

The Wealth Preservation Institute

Recently, I was introduced to what I would term a premium financed life insurance plan that is less than conservative. Actually, I was so put off by what I reviewed that I decided to write about it to make sure agents stay away from this plan.
  • I have private e-mail messages from the agent pitching this plan to a friend of mine.

  • I have proposals from the marketing firm offering this plan.

  • I have life insurance illustrations used to make the sale (using EIUL crediting more than 8.5 percent).

  • I have e-mails from the Actuary & Director of Life Products at the insurance company that was used in the premium financed program discussed in this article.

  • I have a lot of information, and I've done significant research (sort of like a reporter) to come up with my story and conclusions. I have too much information.
Premium financed life insurance (PFLI). PFLI is where an insured borrows money to pay life insurance premiums. Interest on the loan can be paid annually or when needed (the conservative model) or interest on the loan can be rolled up. If the crediting rate on the cash in the policy is substantial enough, interest on the loan can be paid from those returns (also pitched as "free" life insurance and something I do not recommend you get involved in).

Stranger-owned life insurance (STOLI). STOLI is typically a non-recourse lending structure where clients/insureds have "no risk." The structure typically has the client selling their new policy to an investor (who sometimes is also the lender). It's supposed to be "free" insurance while the policy is in place; and when sold, it is a windfall to the insured. STOLI has been hammered in numerous lawsuits and by the attorney general of several states where new laws have been passed to curb the abuse with STOLI.

The plan

Let me get to the PFLI plan that I recently reviewed which got me so outraged that I contacted the insurance company being used directly and asked them if they were out of their minds for allowing a marketing firm to market such a program. I had a weird feeling the insurance company knew nothing about this.

Let me just explain the plan, and I think you'll see why it's one you'll want to stay away from:
    1) A client/insured borrows money from a "unique" source to pay premiums on a PFLI structure (No collateral is required).

    2) The policy has a rider that offsets the difference between the surrender value and the premium owed. It is a seven-year premium with the insured only required to pay the interest for three years, up to four depending upon age/use. The illustration has the interest on the loan being paid from policy cash value starting in year four. (The assumed crediting rate is in excess of 8.5 percent (not conservative or likely to happen)).

    3) The owner can either use the policy as part of their estate planning process or as "tax-free" income replacement during retirement years (at least 12 years from issuance).

    4) An exclusive JV partner is willing to pay the insured's first year cash requirement (making it cash neutral to the policyholder) with the option of buying the policy back at the first anniversary date if the policyholder does not want to continue to service the policy.
What's potentially wrong with the above structure? Plenty.
  • Its classic non-recourse premium financing. There is no collateral. The client is supposed to pay interest on the loan for the first three years, but the JV partner is more than happy to step in at the end of year one to pay that and take over the policy.

  • The take-over of the policy could happen as early as year one. The most abusive PFLI structures have policies purchased after the two-year contestability period ends. This one takes it up a notch by allowing a third party to take ownership of the policy at the end of year one.
What's really going on?

It's pretty simple. Clients are using their insurability because there is no collateral, and they are only on the hook for interest payments on an escalating loan for three years.

Clients will enter into this transaction because the interest payment for the first three years is minimal and because the potential ability to borrow sizable amounts of cash from the policy in retirement is meant to look like a realistic possibility (which it's not because of high crediting rates and variable loans). In essence, clients are willing to roll the dice with this transaction in hopes of getting a windfall in the form of sizable tax-free borrowing amounts in retirement.

I'm not going to come right out and say this is a scam, but I will tell you this: When I told the insurance company what was going on, it was investigated; and I was told that the company would not allow their policies to be used in this structure. As it turns out, the insurance company knew nothing about this private finance structure where a marketing company put together their own PFLI structure with an independent JV lender.

I imagine that the JV partner hopes that the client/insured will not want to keep the policy due to the fact that realistic rates of return in the policy will require interest payments to be paid on the policy for years to come with no guarantee of tax-free income.

You'll never believe this

The icing on the cake was the sales pitch I saw an agent make to a potential referral source (an estate planning attorney) in which the agent offered to pay the non-licensed attorney a referral fee. "I'd fee split with you: depending upon policy size the benefit to you would range between $10,000 to $30,000."

Not only that, but the agent was apparently lying to the attorney about how many cases were in process (shocking). The agent told the attorney that he/she had 36 cases in underwriting. The insurance company told me after investigating that no verified cases were in underwriting.

The moral of this story

We owe it to ourselves and our industry to run marketing firms' plans like this from the industry. I try to do the best I can to warn about things you need to avoid. This is certainly one of those that, if it sounds like a too-good-to-be-true concept, it probably is.

If you run into any scam or plan that you think is questionable, please feel free to forward it to me and I'll research it for free and I will tell everyone to beware if a warning is merited.

*For further information, or to request the actual e-mail explaining how this plan works, the spec sheet given to increase a client's interest, a life insurance illustration, or correspondence a the life insurance company saying they do not condone such a plan, please leave a comment and your e-mail address in the forum below.