Premium loan source. Automatic Premium Loan Definition | Investopedia
Credit spread risk[ edit ] Life insurance carriers and premium finance lenders use the same fundamental financial instruments. Many life insurance carriers have tried, and generally unsuccessfully, to challenge these sales based on insurable interest or by trying to prove that the insured "intended" to sell the policy. Carrier credit rating risk[ edit ] Financing terms are sensitive to the credit rating of the carrier holding the financed policy.
In-force financed policies are being called for collateral in large numbers.
What is 'Automatic Premium Loan'
This is not suitable for the client that has primarily illiquid funds such as real estate. With the more recent advent of indexed universal life insurance policies premium finance transactions are becoming popular for their significant retained capital and potential tax-free retirement accumulation.
In most cases, the client must either post a Letter of Credit LOCsecurities accounts, other non-financed life insurance policies, annuities or any other hard assets approved by Lender to satisfy collateral. Life insurance is personal property.
Brokers transmit the completed premium finance agreement to the premium finance company, and the policy holder is billed as they would be for any other typical insurance policy. Cash investments are the accepted collateral.
A business partner can have an insurable interest in another business partner. Insurable Interest Insurable interest is a concept that dates back to the English legal system. Crediting rate risk[ edit ] Carriers choose the crediting rate of in-force blocks of business at-will.
Lenders provide liquidity at personal debt rates. Advisers are increasingly concerned about the structure of premium finance transactions and are more fully utilizing information and professional services to include specialized premium finance platforms.
The courts have overwhelmingly found in favor of the insureds, finding that insurable interest existed at the time the policy was issued, and there for the right to sell or transfer the policy after issuance was the choice of the insured enjoyed by any asset holder. The client can then exit premium loan source arrangement and realize a gain on investment. As such, premium financing may carry a negative spread for the client financing the premiums.
Advisers generally use a preferred premium finance platform to assist in properly structuring and maintaining servicing on an annual basis life insurance premium finance cases. The secondary life insurance market is highly volatile.
Furthermore, a decrease in the value of collateralized assets such as real estate or securities may require the insured or their estate to post additional collateral. Settlement risk[ edit premium loan source Note - Settlement Risk pertains to Life Settlement Transaction, Not all Premium Finance Transactions Some premium financing programs are sold under the assumption that the policy will have a substantial market value at the end of the term.
As such, any illustrated arbitrage in interest rates between the policy crediting rate and the loan interest rate may not exist in the future.
Eliminates the requirement for a large up-front payment to an insurance company. Risks and mitigation[ edit ] Factors to consider: If the policyholder continues to use this method of paying the premium, it is possible that the cash value of the insurance policy will reach zero. Indexed Universal Life insurance, through Indexing, may provide the policy the interest crediting needed to support the arbitrage.
This is a very misunderstood concept. The policyholder will owe interest on the loan, just as with a standard loan. Additionally, most advisers are utilizing premium finance platforms to aid in the case design, maintenance annual servicing of life insurance premium finance cases, thereby mitigating any inherent risk.
BREAKING DOWN 'Automatic Premium Loan'
Currently, specialty premium finance platforms exist to establish consistency and reliability in premium finance transactions. It is like a car, a home or any other asset that you own.
Virtually all premium financing loans have terms of a duration less than the life of the policy.