With the increasing growth of the life settlement industry, a variety of new secondary market programs are emerging and becoming popular in this relatively young industry. This multitude of programs in the life settlements arena brings true recognition to the actual value of life insurance policies. Recognition can be seen in some effective and appropriate uses of non-recourse premium finance options to purchase life insurance policies. This new option can eliminate or drastically reduce the need for collateral or personal guarantees when financing premiums. When buying a life insurance policy, the life insurance policy itself is an asset that can work as collateral for the policy. This process is similar to financing a car or a house, in that the primary collateral is usually the purchased asset. This approach has become constructive and useful in a variety of situations such as estate planning, business planning, or simply when clients have large insurance needs and assets they wish not to liquidate.
Premium financing and non-recourse premium financing are legitimate practices that can be used wisely to maximize consumer benefits. Keep in mind that it is important to understand some significant factors when considering purchasing a life insurance policy using premium finance. Some “creative” thinkers endeavor to speculate in the value of life insurance policies in ways that are not permissible by law. In financing the premiums of a life insurance policy, the consumer must make sure that there are no arrangements which can be characterized as improper inducements to purchase a policy with the loan. These inducements might include promises of immediate payments for the policy purchase, kick-backs of premiums, or receipt of a portion of the premium to the person insured. The lender who makes a loan against the policy can only have the right of full repayment of the loan and interest from the policy inception. Also, the lender must not have prior agreed rights or arrangements to purchase the policy from the consumer who may wish to keep the policy at any point in the future. It is improper to structure the loan such that the borrower, who has pledged the policy as collateral, is unable to pay off the policy loan at the time of loan maturity. Furthermore, the consumer cannot be required to forfeit the right to sell the policy for a set period or share any profits from the sale in a pre-arranged agreement with the lender if the policy is sold. The lender should only have the right to receive payment for the loan on the terms of the loan. Beyond that, rights to the policy must be retained by a person with an insurable interest in the life of the insured.
At times, proper premium finance transactions are mistakenly characterized as improper life insurance speculation known as "STOLI
". STOLI stands for Stranger Originated Life Insurance. STOLI is the initiation of a life insurance policy for the benefit of a person who, at the time of the creation of the policy, has no insurable interest in the insured. Trusts that are created to give the appearance of insurable interest and used to initiate policies for investors also violate insurable interest laws and are STOLI. STOLI is not a Life Settlement. STOLI transactions are arranged in an attempt to circumvent insurable interest laws. As such, they are illegal.
It is important for consumers to seek information about the legitimacy of life insurance practices. It is equally important that consumers know the difference between lawful and illegal. Consumers should read, ask questions, and educate themselves before entering into any transaction. Financial advisors must employ all financial tools available to provide consumers with products that fit their specific needs and to avoid the traps of illegal practices. Practices must be evaluated following public policies and laws.