PREMIUM FINANCE

Premium Financing involves the lending of funds in order cover the cost of an insurance premium. Premium finance loans are often provided by third party finance entity known as a "Premium Financing Company"; however insurance companies and brokerages occasionally provide premium financing services. In many instances, those companies that provide loans for premium financing must be registered and licensed in the state(s) in which they do business.

To finance a premium, the individual or company requesting insurance must sign a premium finance agreement with the premium finance company. This is a loan contract that lasts for the life of the insurance coverage. The premium finance company then pays the insurance premium and bills the individual or company, usually in monthly installments, for the cost of the loan, although often, depending on the company, the loan interest (cost) is amortized over the life of the loan and becomes payable upon death or the end of the loan period. The loan rate is usually based on an index such as the London InterBank Offered Rate (LIBOR) plus 2-3 points (current 12-month LIBOR rate, as published on http://www.bankrate.com/brm/ratewatch/other-indices.asp is 4.49%). Clearly the risk for the borrower is the rise in interest rates which may cause a higher loan obligation if available cash value in the policy is insufficient to pay cost of insurance, resulting in a negative loan differential and repayment by the borrower for any difference. The use of premium finance to pay for a life insurance policy is a technique generally available to high net worth individuals with significant wealth or assets and a need to cover their "excess" insurable net worth – the amount of additional insurance need above existing coverage owned by the individual (or business entity).

Bromell Associates subscribes to the principles of the Life Insurance Finance Association (LIFA):

STATEMENT OF JAMES H. SINNOTT
EXECUTIVE VICE PRESIDENT LIFE SOLUTIONS INTERNATIONAL
ON BEHALF OF
THE LIFE INSURANCE FINANCE ASSOCIATION (LIFA)
MADE TO THE
LIFE INSURANCE AND ANNUITY (A) COMMITTEE OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS AT ITS HEARINGS ON
"PREMIUM FINANCING OF LIFE INSURANCE, LIFE SETTLEMENTS AND THE RELATIONSHIP WITH STATE INSURABLE INTEREST LAWS"
MAY 3, 2006 Westin Times Square Hotel New York, NY

STATEMENT OF JAMES H. SINNOTT ON BEHALF OF THE LIFE INSURANCE FINANCE ASSOCIATION (LIFA) On behalf of The Life Insurance Finance Association (LIFA) I would like to thank Commissioner Poolman, Superintendent Mills, the other members of the Committee and, of course, the Committee’s staff for giving LIFA the opportunity to speak at today’s important hearing. We would also like to thank the other panels for expressing their views and the many members of the audience who are in attendance today. My name is Jim Sinnott. I’m Executive Vice President of Business Development for Life Solutions International, a specialty finance company based on San Diego. Prior to joining the company I was a practicing attorney in the Atlanta office of Lord Bissell and Brook LLP. One thing I want to make very clear up front is that LIFA is NOT here to defend every transaction that may label itself as premium financing but rather only legitimate premium financing transactions. We acknowledge the legitimate concerns of the commissioners and others regarding illegal life settlements disguised as premium finance transactions, policies issued without insurable interest, IOLI, STOLI and other abusive tactics. We are speaking here only of those premium finance transactions that fit within the spirit of the "best practices" that LIFA will be publishing shortly (i.e. legitimate secured loans used to fund the purchase of life insurance). It is the abuses in the marketplace that were the impetus for LIFA’s formation. The legitimate industry participants realized that without principled leaders promoting "best practices" in the industry and assisting regulators, carriers and the public in differentiating between legitimate premium finance transactions and schemes merely masquerading as premium finance transactions – that bad results for consumers and the industry would result. LIFA will soon issue a policy statement setting forth certain best practices for the life insurance premium finance industry. The best practices will address the abusive practices and programs that a few entities have engaged in – while not preventing legitimate, properly structured premium finance transactions from taking place. Let’s talk for a few moments about some of the specifics. Among the best practices that LIFA endorses are the following:

1. No up front inducement payments to the insured

2. No ownership of the policy by the lender other than traditional collateral rights

3. Full disclosure of the risks and costs of the transaction to the insured

4. Strongly recommending or requiring, depending the circumstances, professional advisor representation of the insured

5. Full disclosure of all relevant loan terms to consumers and life insurance carriers

6. No loans that are disguised life settlements

7. Current settlement law provisions prohibiting the borrower from selling policies during the contestability period should be enforced. The passage of time that results, together with a structure that doesn’t yield a predetermined settlement, should go a long ways towards negating concerns about the insured’s "intent" in procuring a policy using premium financing.

Loans that follow these practices do not violate current insurable interest laws and should not be negatively affected by any efforts to end the abusive practices that may be found in certain other transactions. With that out of the way, l woud like to now take a moment to define a term that has been used repeatedly today, but has never been adequately defined. That term is "non-recourse premium finance loan." Putting aside the fact that every loan is recourse to someone – otherwise it’s a gift and not a loan – there seems to a great deal of confusion around the term "non-recourse loan" with it meaning something different to nearly everyone who uses the phrase. For some, the phrase is used as a proxy for any life insurance premium finance loan that is not a, so called, "traditional," 100% collateralized by assets other than the policy, life insurance premium finance loan. For others, the phrase means a loan that holds no risk to the insured or his or her assets and requires nothing more from the insured than his or her signature and insurability. Other interpretations abound. Can we not define "non-recourse" or must we take Justice Stewart’s approach when attempting to define pornography of "I know it when I see it?," which brings absolutely no clarity to the issue. I think we can do better than that. Therefore, for the rest of our talk, when I use the phrase "non-recourse loan" or "premium finance loan" what I’m really talking about is "any life insurance premium finance loan where the individual insured is not personally liable for repayment of 100% of the loan and/or his or her personal assets are not pledged to secure 100% of the loan. These so called "non-recourse" loans, which use the life insurance policy itself as a principal source of collateral, are a fairly recent phenomena. Why? Because prior to the existence of an active secondary market for life insurance policies, which has only occurred within the last couple of years, no lender could reasonably ascribe a value to the life insurance policy for collateral purposes other than the cash surrender value. Now, with fair value typically far exceeding the cash surrender value of these policies – they can. What effect does this have? After all, fully collateralized life insurance premium finance loans have been used for many years by the limited number of insureds who have sufficient liquid assets available to pledge as collateral for such a loan. The primary benefit is this: The ability to lend against the inherent value in the life insurance policy greatly expands the number of consumers who can purchase needed life insurance using premium finance loans.

So why the objections to making loans more widely available to consumers, which is obviously a good thing? There have been many reasons proffered, but the most credible reasons appear to be in response to a few improper transactions that have been dressed-up as premium finance transactions but are really illegal life settlements or IOLI or STOLI at their core. The problem is: whether through carelessly overbroad scope or through opportunistic overreaching, most of the proposed remedies offered to the "problem" are so broad that they end up prohibiting or severely limiting legitimate life insurance premium finance transactions and thereby harming the very consumers they were trying to protect. Restricting the availability of proper life insurance premium finance loans does a tremendous disservice to consumers and everyone else involved in the creation and maintenance of this valuable product. We must be careful not to, as they say, "throw the baby out with the bathwater." Now that we’ve set the stage, I’d like to step back for a second and examine some of the underlying issues in more detail. First. Whether a life insurance premium finance transaction is "recourse" or "non-recourse" is in no way, in and of itself, determinative of the existence of an insurable interest by the applicant. A "recourse" loan transaction can be structured in such a way as to fail to have insurable interest just as easily as a "non-recourse" loan transaction. We’ll revisit this in a few minutes when we examine some of the objections others have raised to these transactions. Second. Other than the fact that the collateral is a life insurance policy (which, admittedly, has certain unique characteristics), a properly structured, "non-recourse" life insurance premium finance loan is, at its core, no different than any other secured loan. We finance our homes, our education, our cars, and many other long-term, expensive assets. We even finance much of the insurance that insures these assets. Why should we discriminate against or treat the purchase of life insurance (which is most definitely a long-term, expensive purchase) any differently? The answer is that we should not. Third. LIFA believes consumers should be afforded the flexibility to choose how or whether they finance the purchase of their life insurance. LIFA opposes efforts to limit consumer choice by limiting their ability to procure the life insurance they want or need. Consumers choosing to finance the purchase of their life insurance policies should not be discriminated against based on how they choose to finance the acquisition of this long term asset. The availability of properly structured life insurance premium financing benefits consumers and all other constituents of the life insurance purchase and sale and financing transaction by:

1. Allowing consumers to purchase life insurance that they otherwise would not have been able to purchase without:

2. liquidating long-term or other illiquid personal assets,

3. revamping their entire financial plan, or
4. otherwise impairing their financial condition.
5. Facilitating the sale of more life insurance policies by life insurers and their agents to consumers; and
6. Allowing lenders to earn a reasonable rate of return on funds deployed for life insurance premium finance loans.

Allow me to cite a typical scenario where only so called "non-recourse financing" would accommodate the needs of the consumer. First, the facts: A 75 year old widower has a net worth of approximately $10 million – nearly all of it tied up in a working ranch that he lives on and that yields a modest income. Like most farms and ranches, the property is subject to several pre-existing liens – one of which precludes him from refinancing the loan for several more years. The man would like to pass the ranch down to his youngest son, who has worked the ranch with his father for many years. The man is concerned that in order to pay the estate taxes that would be due upon his death he would have to sell the ranch. His trusted financial advisor urges him to buy insurance to cover the taxes, but paying the $250,000 year premium is simply not possible until he refinances the ranch’s loans in a couple of years. The man and his advisor explore their premium finance options. Very quickly, it becomes obvious, that due to the preexisting liens on his assets "traditional" premium financing is not possible. Fortunately, the advisor learns of my company’s premium finance loan. Using the policy itself as the collateral for the first several years of the loan, the man can acquire the insurance he needs when he needs it. He doesn’t have to wait several years to get the coverage he needs – during which time anything can happen. He could die or he could have a health decline that makes him uninsurable. Without the ready availability of so called "non-recourse" premium financing the man could not purchase the insurance that he wants and needs. Fortunately, the industry and regulators already have tools that can effectively weed out the illegitimate programs if used properly. A combination of more rigorous enforcement of existing insurable interest laws and as or maybe more importantly, actual carrier practices that have already evolved in response to these issues, is having a dramatic effect on eliminating the worst of the bad programs.

In fact, in recent months some of the more proactive carriers have done a remarkably good job of putting into place procedures that permit them to determine the legitimate transactions from the illegitimate ones. Whether it be by questions added to insurance applications, supplemental questionnaires to insureds and/or agents, diligence regarding the actual underlying loan transaction, or policies and rules set down for their agents, certain of the carriers have very quickly put effective tools into action that, IF USED PROPERLY, should allow carriers to establish that an insurable interest exists in a premium finance transaction - thus allowing legitimate premium finance transactions while stopping abusive transactions with no insurable interest that are merely dressed in the guise of a premium finance transaction in order to give an air of legitimacy. Obviously, carriers can go too far with such inquiries and use them as a cover for discriminatory practices and not just establishing insurable interest. We trust that with continued vigilance by all parties involved that this will not be the case. I’d like to now spend a few moments addressing some of the items that have been bandied about by various parties when discussing premium finance. As I noted earlier, there are legitimate concerns about certain practices – which we feel can be adequately addressed through careful application of existing law and carrier best practices. What I’m talking about now are the many "red herrings" that opponents of premium financing have introduced into the discussion. What makes them powerful is that they contain just enough truth to be accepted on their face as legitimate concerns. IOLI and STOLI, prepackaged settlements, and lack of insurable interest seem to be the most common themes for these objections. We’ll examine them in turn: A legitimate life insurance premium finance transaction is not IOLI or STOLI. A life insurance premium finance lender should not: (i) own the policy or (ii) control the policy’s disposition, except in connection with enforcement of its rights in connection with a loan default. A premium finance lender must be permitted to take a security interest in the collateral provided to secure the loan. If part of the collateral is the life insurance policy, then the lender may take a security interest in the policy. This is no different than any other asset backed loan such as your home mortgage or auto loan. Of course having a security interest in an asset that collateralizes a loan carries with it certain rights for the lender that center around preserving and protecting the asset and its value – but this is to be expected and is standard for secured loans. Recent public statements have been made indicating that the mere existence of a security interest in a life insurance policy means that the policyowner does not really own the policy. Such statements are disingenuous at best, mischaracterize the role of life insurance premium financing, and ignore the long-standing practice of carrier’s use of their own forms of collateral assignments of life insurance policies. If we were to accept this analysis, it would mean that no homeowner or car owner "owns" their asset if they financed it – which we all know is not true. In fact, the only way a premium finance lender will exert ownership like control over the policy is upon an event of default by the borrower and the subsequent foreclosure on the collateral by the lender – just like any other collateralized loan. The mere existence of such security interest and the possible foreclosure on that asset cannot be construed to mean that the lender is somehow the owner of the policy at loan inception. One of the more commonly cited indicia of STOLI is an increased rate of return to the lender/investor if the insured dies prematurely. Quite to the contrary, in a proper premium finance loan the lender actually is financially harmed by the early maturity of the insured and the corresponding early termination of the loan from which the lender makes the bulk of its profits.

A properly structured premium finance transaction is not a "prepackaged life settlement."