 Recession Casualty
Premium financing gets whacked as credit is squeezed.
The old adage “neither a borrower nor a lender be” has a contemporary ring to it these days. Faced with a credit crisis that resulted in a near meltdown of the financial sector and the worst economic contraction since the Great Depression, more financial institutions and high net worth clients are questioning a much-touted life insurance funding technique: premium financing.
“Premium finance facilities depend on access to credit,” says Bill Hager, founder and president of Insurance Metrics Corporation, Boca Raton, Fla. “As that access tightens, premium finance facilities are boosting lending requirements for borrowers. Institutions are imposing more rigorous credit underwriting and showing more prudence when extending credit.”
James Sorebo, president and CEO of Four Seasons Financial Group, Mt. Laurel, N.J., agrees. “Most brokers understand there isn’t as much money to be made in this space now. At this time last year, we were reviewing more 400 applications for premium financing. Now, we’re looking at fewer than 100.”
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Until the current recession, sources say, many affluent clients were turning to this technique—taking out a loan from a bank or other lending institution to pay premiums on a large life insurance policy—to meet short-term cash flow or investment objectives. This strategy frees up money for clients with large estates, typically those valued at $10 million-plus and comprising mostly illiquid holdings, such as real estate or business assets. Funds that otherwise would be used to pay policy premiums can instead be conserved or invested in vehicles to produce a higher rate of return than what the client would pay on the cost of the loan. Read Full Article
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