‘Unscheduled’ Policy Loans Can Create Sales Opportunities

By Anthony Giannone

One of the most basic concepts behind the purchase of permanent insurance is the right to borrow from the cash value of the policy.

Some sales strategies involve the use of policy loans in effect to create a personal bank from which policy owners may borrow and, in theory, repay.

The sales pitch has always been that the loan rate charged by the carrier is low or reasonable in relation to prevailing rates and that loan repayment is optional, at least with respect to the tax consequences. The ability to borrow from oneself and to effectively dictate the terms of the repayment is an attractive and valuable feature.

From an illustrative point of view, loans are the cornerstone of retirement income, deferred compensation and premium financing strategies. And the type, duration, cost and magnitude of the loans have a direct impact on the success or failure of these plans.

Although these “scheduled” loans are important in the sales process and definitely need to be managed properly, they do not necessarily create new sales opportunities.

But there are a huge number of “unscheduled” loans that go mostly unnoticed until they become a threat to the policy or an unwelcome tax problem for the insured. I believe these present a clear opportunity not only to help clients, but also to create new commissionable sales.

These loans are usually taken by the policyowner in times of economic stress and continue to accrue because the client lacks a clear understanding of how the loans affect the coverage and possibly their tax obligations.

Premium Loan Feature

In the case of whole life policies, loans are often the result of the automatic premium loan feature that creates a loan equal to the required premium when clients miss a premium payment, either intentionally or not. Typically, when clients realize they can continue this process, they repeat it.

The result often is a huge loan that accumulates until the client receives notices indicating a sharp reduction in benefits or impending lapse. And the reaction to this news is most often met with either misdirected indifference or panic.

We know that recognition of gain occurs when an over-loaned policy lapses. But clients typically don’t realize that until the situation is acute. The problem is the relationship between the size of the loan and the aggregate cash value.

With a loan to value of 80 percent or more, there is virtually no way to make a clean 1035 exchange with the limited number of carriers that will take loans over. To further compound the problem, some of the large mutual carriers routinely refuse to transfer a loan to another carrier via the 1035 exchange process.

Another issue that deserves attention is the cost of the loan. From the late 1980s and well into the late 1990s, most policies had a standard 8 percent loan rate. This is a rate that is easily 200 basis points higher than prevailing market loan rates today.

Even worse, many policies have variable loan rates, that even now are costing policy owners in excess of 10 percent. We have even seen policy loan rates as high as 13 percent!

An Opportunity To Satisfy

Put this all together and you can see that there is a huge opportunity to identify and remediate policy loan problems that can result in new compensation and satisfied clients.

Recently we’ve had the opportunity to audit a number of policies on the lives of insureds of various ages, with various policy types and loan sizes, and the outcomes were significantly better than we anticipated. There are two important reasons for our positive results:

1) We found the few carriers that are actively looking for loan transfer opportunities and know how to make them work, and 2) we found a premium finance company that has exactly the right loan methodology to rescue the policies that have too extreme a loan to value percentage for a traditional loan transfer 1035 exchange.

Of our most recent audits, several of the policies had been kicked around by the agents for years in an attempt to find a solution that would not require the policyowner to repay the loan out of pocket.

Another client had a 90 percent loan to value on a whole life policy issued in the late ’90s. This one was complicated by the fact the client has medical issues that limited his options to one carrier, who did not accept loan transfers (even if the loan to value made sense).

So, making this one work involved a premium finance lender and some creative use of the new policy’s withdrawal and loan features.

As we thought about the outcomes, we realized that this is an often overlooked corner of the market where there are huge numbers of clients to be helped and equally large commissions to be garnered.

By becoming experts in the process of evaluating loan rescues, you can save clients large amounts of money by reducing their overall costs, reducing the loan interest rates and repaying loans out of the values of a newly issued indexed universal life or universal life contract, and at the same time restore the client’s originally desired benefits.

The process is a bit complicated and requires some luck in underwriting, but the outcome makes it worthwhile for all parties.

Anthony Giannone is a partner at CPI Companies. He has more than 15 years of experience in sales and providing support to financial advisors. He may be contacted at [email protected].