Premium financing: Still a viable option in today’s rising interest rate environment

How Allianz maintains 2,000 premium finance policies, demonstrating outstanding persistency while continuing to bring in new, high-quality premium finance business — even in a volatile market environment.

Allianz Life Insurance Company of North America (Allianz) continues to be one of the leaders in premium financing, with a stringent vetting process and a team approach to this advanced markets solution for high net worth clients.

While rising interest rate headwinds and volatile markets have some asking whether premium finance is still a good idea today, ask Advanced Markets or Product Development at Allianz and you will learn that for specific situations, premium finance is viable.

Allianz believes it’s important to fully understand the ins and outs of premium financing in order to make an informed decision about whether the time is right and whether you have the right candidate for this type of transaction.

Allianz’s diligent assessment and allowance of premium finance cases has enabled them to facilitate many successful transactions over the years.

“While there is an abundance of opportunity in premium finance, there are only certain scenarios that make the cut at Allianz,” says Todd Petit, Head of Advanced Markets, Allianz.

Identifying a Good Candidate

“Prior to any conversation about premium finance, the first step is to establish the need for life insurance. Second is to determine how the client will pay for that needed life insurance. If the client has a better use of their assets or income, such as retaining those funds in their investments or perhaps their business, then a discussion can be had as to whether borrowing money from a third-party institution is an option,” says Jeremy Conover, Director of the Advanced Markets team that exclusively handles premium financing for Allianz.

The typical candidate for traditional premium financing programs is a high net worth client. In an emerging market, hybrid premium financing life insurance is purchased for the death benefit as well as the cash value, which can be used to supplement retirement income through policy loans and withdrawals.¹

In both designs, the candidates should be people who understand and appreciate the potential advantages/risks of using leverage.

Why Use Premium Financing?

“To give a hypothetical example, imagine you have a real estate client who needs $10 million of life insurance for estate planning strategies. This coverage will require $250,000 per year in life insurance premiums, which the client is willing to pay using funds they have accumulated in a brokerage account. You discover the client has $4 million in that brokerage account and it has been earning 10%. As the agent, you let the client know that one way they could pay the $250,000 in life insurance premiums is with money from that brokerage account. However, instead of forfeiting the 10% earnings on that money, they could borrow it from a third party — where they may pay less than 10% in interest while keeping that $250,000 in their brokerage account working for them,” says Conover.

“Clients who are typically interested in utilizing premium financing want to retain their capital,” Conover adds. “Rather than pay large life insurance premiums, they find it more attractive to borrow the funds from a bank and pay the loan interest, which is typically less than life insurance premiums. They may also be interested in premium financing if they are purchasing life insurance for estate planning purposes where the individual is running up against gift tax limitations.”

Parties Involved in a Premium Finance Transaction

Premium financing is a complicated transaction with multiple parties involved: insured, owner (if different), agent, vendor, bank and insurer. Without the right partners, things can easily go awry.

“A key role in a premium finance transaction is the premium finance vendor tasked with ensuring the loan and policy performance are both monitored and that communication flows between all parties so the program stays on track. Taking action to make changes within the policy is also an important component of ongoing management of a premium finance policy.

From refinancing or paying off the bank loan, to changing policy features or allocations, making changes when needed will help ensure the client’s objectives are still being met. Allianz has a strict vetting process for vendors and requires any agent we work with to have an approved premium finance vendor involved. This helps ensure client satisfaction over what is typically a 30-plus-year transaction,” says Petit.

Preventing Potential Pitfalls of Premium Financing

“Because Allianz is willing to sacrifice top-line growth for quality premium finance cases, we’ve been able to yield strong results and policies, upholding a 98% renewal rate on premium-financed policies,”² says Petit.

“Whether a premium finance case works out well is often dependent on how it’s positioned from the start,” says Austin Bichler, Head of Life Insurance Product Development. “Allianz takes a strong stance in opposition to the way premium finance is sometimes sold — as ‘free insurance’ or a ‘more affordable option.’ Problems also arise when realistic expectations aren’t communicated from the beginning, or risks are not explained properly.”

Premium finance is a long-term transaction, so if not monitored frequently, it can lead to complaints.

This ongoing management of premium finance transactions is paramount, as many factors can change as time goes on, such as loan expenses, interest rates, policy performance, loan qualification, loan exit plans and more — any of which has the potential to cause problems if not monitored and reacted to.

Petit says, “These issues can be avoided with alignment between the parties involved, which is why Allianz places such emphasis on selecting a vendor that meets specific criteria: they’re committed to this business over the long term and adequately staffed to actively manage policies for the next 30+ years as well as handle the annual renewal process. Because vendors are making financial projections sometimes 30 years into the future, Allianz requires they make conservative projections when designing coverage in order to set realistic expectations and then evaluate risks and benefits each year.”

Premium Finance Business Differentiators at Allianz

Allianz requires agents to not only go through their premium finance training program before writing any business but also work with one of the carrier’s vetted premium finance vendors that administer these plans and provide the customer with stress test examples.

“The requirement of stress tests is a key Allianz differentiator that has the life insurance policy illustrated at various crediting rates to demonstrate the variability of policy earnings. Additionally, we require that loan interest rates in future years be modeled using rates we provide and not some arbitrary number, again to demonstrate variability of the loan interest. The entire goal of this process is to create transparency to the customer around the items that move in their program and how variability can impact their desired results,” says Conover.

Premium Finance in a Rising Interest Rate Environment

In an increasing interest rate environment, setting expectations is important. To give clients a complete understanding, stress tests must be done to show what the future potentially looks like given the economic environment, and evaluated on a yearly basis for continued effectiveness.

“It’s important to recognize that there will be times when premium finance works and times when it doesn’t,” says Conover. “There are going to be periods when clients don’t earn that 10% from our earlier example. Instead, the client might only earn 2% one year, and the loan interest could be higher than what they’re earning in that brokerage account. However, reviewing these plans on an annual basis and continuing to monitor and make adjustments helps defend against potential pitfalls.”

“Allianz didn’t procure 2,000 premium finance policies by saying yes to every case that came through the door. The number, size and persistency of premium finance policies on the books is a testament to the agents we choose to work with, the specific requirements set forth and the vendors we’ve vetted. We strongly believe not everyone is a candidate for premium finance, and the strategy is not the starting point for a conversation,” says Petit.

Premium Finance Product Fit

When one is choosing the type of insurance product that may be suitable for a premium finance strategy, there are options. The estimated breakdown by type puts IUL as the majority in most cases, whole life being used in a little more than a quarter of cases and the remainder using universal life.

Bichler says, “Allianz focuses on accumulation IUL and takes into consideration what could be effective in a premium finance situation when creating our products. This includes the accumulation potential, the fee structure, the unique indices, flexibility and other benefits.”

If your clients are considering premium financing, Allianz and their approved vendors can provide support in executing these transactions. While there may be some headwinds currently, working with the right partner can help ensure that such headwinds will be accounted for. As Petit says, “If your house crumbles, it’s because you built a straw house. Allianz can help you build a stronger support system for your premium finance cases that can help them weather volatile market conditions.”

Find out more

To learn more about how Allianz products and services can help support the premium financing conversation through volatile market conditions, visit https://bit.ly/allianzpf or for specialized support, contact Jeremy Conover at 949-351-2542.

Clients considering a premium financing strategy should consult with a financial professional to ensure they understand the potential benefits and risks as well as their tax advisor and attorney to discuss their specific situation.

1 Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.

2 Internal Allianz statistic as of 6/2022. Number of lapses/deaths compared to number of years a policy has crossed over an anniversary.

Guarantees are backed solely by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America.

Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297.