More Insurance Sales Mileage With Hybrid Financing.

More Insurance Sales Mileage With Hybrid Financing.
By Gershon Yarmush
Finance For Life, LLC

Everyone is talking about hybrid premium financing. But what is it exactly, how does it benefit clients, and how do agents sell it? What does hybrid even mean when used in an insurance context? The following is a short explanation of what hybrid premium financing is, how it evolved, and the proper way to sell it.

In order to properly discuss hybrid loans, we need to have a basic familiarity of how the old non-recourse loans worked. Non-recourse loans for life insurance first became mass marketed and popular with the public in early 2001. Agents approached a senior, of reasonable health and with assets usually in excess of five million dollars and offered to get them a loan for a substantial life policy with no recourse to them. How was this possible? You and I both know that when a bank loans a prospective home buyer hundreds of thousands, if not millions of dollars for the purchase of a home, they require security. (Or at least they used to, in the more sane world that existed before our present subprime mess.) This security is usually the home that the loan is being made upon, with a thorough investigation conducted by the bank to ensure that the home is worth more than the amount they are lending, should the borrower default. Life insurance loans also need the same level of security.

With traditional premium finance insurance loans, around for decades, the collateral is an “outside” asset, usually a letter of credit, collaterally assigned bank CD or real estate. In a non-recourse loan, similar to our home loan example, the object of the loan, i.e. the new life insurance policy being purchased, acted as the collateral for the bank. The bank, or a premium finance promoter acting for the bank, conducted a strict actuarial review to determine the policy’s worth at the loan term period, which was typically two years. By using the term “policy worth” I am not referring to its cash surrender value or its death benefit, but rather its predicted future settlement value at the two year mark. This value must be greater than the amount loaned or the collateral is deemed insufficient and the loan is not made. Sometimes the collateral value was deemed to be in such excess that an additional loan was made, in the form of a cash advance to the borrower. Typically these transactions also featured no out of pocket costs, with all interest and fees rolled into the loan. Needless to say, the math was good and insureds bought in like hotcakes.

However, although sales of this type of insurance product were brisk for several years, in December of 2005, sales slowed tremendously and insurers started denying applications. The insurers had several concerns. One, they felt their products were being sold as free insurance to clients who had no skin in the game, and were therefore more likely to let their policies travel to the settlement market. This they claimed impacted their lapse ratios. Second, since the funders were not actually collecting fees and interest on these deals upfront from the clients, they felt justified charging a very high interest rate and high fees, as the money would only come out of the profit on a backend sale. Insurers didn’t like the thought of their clients being gouged, and felt the steep exit costs would further force more of the paper onto the secondary market. The market got the message and evolved to meet new carrier requirements and continuing demand by developing hybrid premium finance.
By now, most of you have seen a Prius or two driving around your neighborhood, or you may even own one yourself. The car, one of the first hybrid models on the market, has been a fast seller amongst consumers interested in lowering their gas expenses. It is called a hybrid car because it has two different parts that perform the same function; the combustion engine runs off ordinary gasoline and the electric motor that runs off a battery pack. Both of them work together to make the auto function.
Hybrid, in an insurance premium finance context, refers to the collateral underlying the loan made to purchase the insurance. While in a pure non-recourse transaction the policy alone serves as the collateral for the loan, in a hybrid loan the collateral is supplanted with upfront out of pocket interest payments and/or partial personal guarantees. This “skin in the game” has gone a long way toward assuaging carrier concerns that the insureds lack a personal stake in the policy purchase. Since the clause allowing the client to “walk away from the debt” has been removed, the client will suffer a real financial loss if they do not meet their loan obligation. The matter of the high interest rates and fees has worked itself out as well through increased market competition for these loans. Funders who have stayed in and those who entered the market post 2005, have reduced these fees considerably and also removed onerous prepayment clauses and restrictive settlement broker “lock-ins,” in order to compete with each other. Historically most of these loans are also based on a simple spread above Prime or LIBOR, which right now is quite low. The rates charged on loans today are usually in the 6.5-9.5% range, as opposed to the 2003-04 era where they were effectively as high as 16-18%, or more. The evolution of the loans has also included an extension of the loan terms. While the old loans were two years or thirty months, the new loans allow for the original two year commitment to be extended for up to seven years with some programs, provided that a re-evaluation of the collateral proves it to still be sufficient.

The purchase of a life insurance policy utilizing a hybrid loan has many benefits to insureds. It allows them to get into a valuable insurance product, while they are relatively healthy, with little out of pocket. This is especially important to “land rich, cash poor” clients who have a well defined need, but poor cash flow. The collateralization aspect is not as burdensome as a traditional loan because the use of a partial personal guarantee and the policy’s secondary market value does not encumber any other specific assets. The hassle and costs of applying for a letter of credit can be forgone as well. Hybrid loan terms and documents are extremely client friendly.

As an agent, there is tremendous profit to be made as well. These cases are not run of the mill term cases. Each successfully completed case will result in a payout based on the sale of a permanent product, to a senior, in excess of five million in face and with targets ranging from the low end of $150,000 to the high end of $3-4,000,000, as we have seen on some sixty million dollar face cases on clients in their late 70’s to early 80’s. Even after the agent splits the commission with the funder and broker, as is required with all hybrid deals, the producer is usually left with a substantial case share of 55-70%.

Before you arrange sales meetings, you have to properly qualify your clients. Most hybrid finance providers are looking for cases on seniors (ages 65-89), in reasonable health (standard risk or better), that have face amounts in the five million plus range. While that may seem like a pretty narrow set of criteria, submitting cases outside of that box may result in a lot of wasted time, as it can take 4 to 8 weeks just to qualify the case enough for a “no.” That being said, we have received approvals on clients as young as sixty two and a half (albeit for nine million of face) and a table E rating (over seventy for ten million). So a good broker can advise you when it pays to stretch the box.

When you are finally in front of a qualified prospect, you must properly apprise him of the pros and cons. The transaction is by no means free or no risk insurance and the client will definitely not be receiving any upfront payments. It will be a long process; from the preliminary meeting to final close can be as long as six months, four if you are lucky. It is a shorter term loan, usually with no out of pocket, but the options and exit strategies at the end of the term should be discussed, be it loan payoff, refinance or reevaluation or posting of additional collateral. Some of your clients may be interested in the secondary market as a liquidation option, but must be warned that if they sell their policy their capacity to purchase future estate coverage will be jeopardized, as policies inforce on their lives count towards insurable capacity no matter who the present owner may be. Of course, a tax professional should be consulted as well.

Good brokers play an important role in navigating you through this new world of hybrid premium financing, so don’t try to do it solo. Their job is to facilitate these transactions, simplify and explain programs and allow agents to be assured that they are receiving the best loan package for their clients. Brokers also vet programs to ensure they meet carrier specifications and that they are competitive. Distributors and aggregators speak the language of the funders and know how to present and negotiate cases, ensuring a high placement ratio. They also ensure that the fees and interest being charged to the client are fair, and their agents are receiving the most competitive compensation.

To summarize, hybrid premium financing is a fancy name for an exciting tool that gives producers access to the high target, high face senior market. Hybrid is also a great way for seniors to get a large policy started with low startup costs and low risk to their existing capital and should be considered by advisors in the estate and financial planning process.

To receive more information about the premium financing programs that are available contact Gershon Yarmush, Vice President of Operations at
877-763-0098 or email: info@financeforlife.com.