Rising interest rates and a falling stock market are putting new pressure on a popular strategy of borrowing to fund the purchase of multimillion-dollar life-insurance policies.
Even before rates started to rise, consumers were being forced to make big payments when strategies failed to deliver the promised returns. Many sued their agents and insurers.
So-called premium financing has been around for decades. It was mostly used by the super rich to fund large policies that act as tax shelters and offer death benefits worth tens of millions of dollars. When interest rates hit zero, many more people borrowed to fund their policies.
The lawsuits claim that agents misled them about the strategy’s risks. The policies are supposed to generate enough income to repay the loans, which can also be repaid through the death benefit. People often take out one- to five-year loans, with interest rates that reset annually. They also face risk of loans not being renewed.
In court filings, the agents and insurers, Pacific Life and Lincoln National, deny the allegations, which include misrepresentation. Chad Weaver, an attorney for Wayne L. Weaver, one of the agents, said “the premium-financing strategy was implemented after numerous meetings and disclosures, and was completely consistent with [Mr. Marenzi’s] objectives and financial situation at the time of purchase.”
Insurers don’t release information on the use of premium financing. The Life Product Review, an industry publication, said a 2021 survey of about 60% of the premium-financing market identified $800 million of loans at those firms to pay for policies taken out in 2020.
Author(s): Leslie Scism
Publication Date: 22 Sept 2022
Publication Site: WSJ