You know the clich? -- when a great opportunity appears on the cover of Money magazine, it's time to sell. The
same can be said about trade press articles. When one particular product or strategy is the subject of focus, you can bet it's at its peak. Premium financing is a current example. If you're unsure of what is is, pick up a recent issue of any industry publication.
Premium financing involves the financing of a large life insurance policy (usually $2 million and up) by another company for the first two or three years. The policy can then either be sold to a third party or purchased by the insured's heirs.
Nothing is inherently wrong with premium financing. Buy/sell agreements and keyman insurance have used similar strategies for years. But increasing numbers of advisors are learning about the commissions associated with the strategy, and the rush is on to get their piece. As a result, insurance carriers are now faced with a problem.
In the past, older clients with large policies paid premiums for a certain number of years. They then decided they either didn't need the policy or it was too expensive, so they stopped the premium payments and the policy lapsed. The insurance companies received a sum of money and never had to pay out. But now a third party continues the payments, insurance companies are paying hundreds of millions in death benefits and not enough of the large premium policies have lapsed. Since the whole idea behind insurance is to collect as much as possible and pay out as little as possible (for consumers and providers), carriers are beginning to back away from the premium financing business.
Another problem with the rush to sell big commission products is the inevitable regulatory scrutiny. Congress is already pushing to levy an excise tax for the sale of insurance to third parties that have no insurable interest. No joke; some have suggested an excise tax as high as 100 percent of the profits.
There are legitimate uses for premium financing, as is the case with most financial products and strategies. But why does the number of clients who need it grow simply through the awareness of how much other advisors are making? Does it bode well for our industry?
If you present yourself as a comprehensive advisor, then you should focus on client need and make suitable recommendations. Premium financing may indeed be one solution to a client's situation; it's just not a solution
for every client's situation.
Mark S. Wyckoff is a financial consultant and has spoken to, and worked with, industry advisors from all over the country. To e-mail him about his column or for interest in having him speak or provide training, you can contact him at markw@connect2.com.
