Life Premium Financing Arrangements: The State and Federal Rules

Think about federal regulation.

Premium financing is not subject to federal statutes or regulations any more than traditional financing may be. While certain federal laws will apply, such as anti-fraud provisions and truth-in-lending disclosure requirements — which detail payment rates and schedules, life insurance premium financing is largely governed on a state-by-state basis.

Some lenders choose to avoid licensure by operating below the state's interest rate limit. This limit is generally less rigid, or even inapplicable, for large-sized loans because states are more protective of smaller loans — they assume small-amount borrowers are less knowledgeable about the process and thus need added protection.

Change happens.

Rules and regulations are always subject to change. So what's the best way to stay up to date? There isn't a single one-stop shop or resource for life insurance premium finance information. Instead, advisors can seek out relevant content across the web and also read up on each state's usury laws.

Advisors might also join relevant trade groups. For example, the National Premium Finance Association (NPFA) does work across the United States pursuing conformity among state statutes. (Although, it's worth noting that the NPFA focuses less on life insurance premium financing and more on property and casualty policies.)

Some states, such as Alabama and New York, have mentioned premium finance arrangements in COVID-19-related guidance and emergency regulations.

The lenders fall into two categories.

Mastering premium financing for life insurance policies can be a complex task. State and federal rules are just one part of the equation. In addition to adhering to all regulations, advisors and borrowers should also ensure they are interacting with an established, reputable lender that has a strong pedigree.

Generally, life insurance premium finance lenders fall into two categories. The first is comprised of big commercial banks, which offer competitive interest rates (usually in the single digits) but have limited flexibility. These commercial banks typically rely on a policy's cash value to secure the loan, but they will sometimes accept other assets (like personal guarantees, portfolios, or marketable securities) to collateralize the loan.

The companies in the second category, private premium finance lenders, charge much higher interest rates (usually in the low to mid teens) but are much more flexible when it comes to collateralizing the loan. For example, many private lenders will look at a life insurance policy's death benefit, rather than its cash value, in order to secure the loan. This means borrowers don't have to present a personal guarantee or other liquid collateral. Further, private lenders will often defer interest payments until the loan's maturity. In the current economic environment, with unemployment skyrocketing and personal liquidity dropping, using a life insurance policy as collateral is a critical alternative to what may be dwindling assets and personal net worth.

When it comes time to make life premium financing arrangements, be sure you do your due diligence — from meeting federal rules and navigating state regulations to choosing the lender that's right for your client.

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Scott Rose is the vice president of Fifth Season Financial, a specialty lender that serves clients who are dealing with advanced-stage illness. The firm operates the Funds for Living and Giving (FLAG) program, which gives a client the ability to receive an advance on a life insurance policy. He can be reached at (866) 459-1271.