• March 3, 2024
• Premium Financed Life Insurance

The Wolper Law Firm represents investors around the country who have lost money in complex investment and insurance strategies, including premium financed life insurance policies.  Insurance strategies involving premium financing arrangements have become popular in recent years because of the low interest rate environment.  Insurance brokers and agents present premium financed life insurance strategies as a means for an insured to increase death benefits and wealth accumulation at a lower out-of-pocket cost.  With interest rates rising between 2020-2023, these strategies have derailed, resulting in massive losses to the insured.

 

If you have been sold a life insurance policy coupled with a premium financing arrangement, and the characteristics and risks of the strategy were not fully disclosed, please contact the Wolper Law Firm at (800) 931-8452 or by email at mwolper@wolperlawfirm.com for a free, confidential consultation to discuss your legal options.

 

What is Premium Financed Life Insurance?

 

Premium financing of a life insurance policy involves securing a third-party loan to pay the premiums.  With premium financing, the third-party lender pays the full premium amount as established by the life insurance company.  An interest rate is then assigned to the borrowed amount, which is paid by the insured to the third-party lender.  The loan is retired after a pre-determined period of time (i.e., approximately ten years) and, in a perfect world, the appreciation in cash value of the underlying life insurance policy is sufficient to retire the loan.

 

If either the interest rate rises to a level higher than projected or the policy performance is lower than projected, or both, an insured may receive a collateral call from the third-party lender.  If the collateral call cannot be met, the insured will be in default, prompting the third-party lender to cease making premium payments.  Premium financing adds a layer of complexity to an already complex life insurance policy, which is designed to provide risk mitigation and peace of mind.

 

How Premium Financed Life Insurance Strategies Have Gone Awry

 

It is important to understand that life insurance is a lucrative industry and agents/brokers get paid large commissions typically based on the amount of the policy premium in year-one together with a smaller trailing commission in subsequent years.  This incentivizes insurance agents/brokers to recommend larger policies with high, front-loaded premiums—even if the recommendation may not be in the long-term best interest of the insured.

 

Insurance policies are complex and most retail insurance clients rely on their insurance agent/broker to describe the policy characteristics and risks.  In many states, insurance agents/brokers are deemed fiduciaries, which imposes a heightened standard of care.  In any circumstance, the insurance agent must disclose all material facts relating to the proposed insurance policy and strategy.

 

Prior to the issuance of a life insurance policy, insurance agents/brokers must provide the insured with an illustration prepared by the insurance company that demonstrates the anticipated performance of the policy.  Often times, insurance agents/brokers provide illustrations with lofty assumptions regarding policy performance.  If the illustrated benchmarks are not met, the policy will underperform and possibly require a greater cash contribution from the insured.

 

When a premium financing arrangement is involved, there is an additional variable introduced—borrowing costs.  Unfortunately, most insurance companies, themselves, do not generate illustrations that depict the performance of the life insurance policy together with the premium financing loan because the loan is obtained via a third-party.  In this instance, the insurance agent/broker is required to make these disclosures, which is often the source of the problem.   Insurance agents/brokers are trying to make a sale and generate a commission.  In order to accomplish this objective, insurance agents/brokers will often illustrate the best possible performance of the life insurance policy coupled with the most advantageous interest rate environment.  In other words, an insured is led to believe that the life insurance policy will generate sizeable returns while the borrowing costs will remain low.  Insurance agents/brokers often do not provide an insured with alternative scenarios that illustrate adverse market conditions and/or changes in interest rates.

 

Following the financial crisis, interest rates remained low, and many insurance agents/brokers recommended larger life insurance policies with larger associated premiums.  In order to make these seemingly more expensive transactions attractive to clients, premium financing was introduced, whereby the client only paid the interest on the borrowed amount.  The sales pitch often does not paint a realistic picture of the interplay between interest rates, policy performance and market conditions.

 

For years, the Federal Reserve indicated its intent to raise interest rates in order to resume efficiency of the markets.  Many insurance agents/brokers ignored this.  This proclamation has become reality with interest rates rising from below 3% in 2020 to more than 7.5% in 2023.  Suddenly, all of the premium financing arrangements that were presented as “low cost” have created negative arbitrage, meaning the cost of borrowing exceeded policy performance.  Policy holders have begun to receive collateral calls from third-party lenders involved in the premium financing arrangements.  For many policy holders, they are unable to meet the collateral calls, resulting in the surrender/lapse of the life insurance policy, loss of cash value, premium payments and death benefits.  This conduct may provide a cause of action to the insured if based on inadequate or misleading disclosures.

 

The Wolper Law Firm, P.A. Offers Free Consultations

 

The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis.  Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled more than 1,000 securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at (800) 931-8452 or by email at mwolper@wolperlawfirm.com.