WealthManagement.com column argues client pride and leverage worsen premium-financed insurance losses

A WealthManagement.com column published Oct. 14 argues that client pride and leverage deserve part of the blame when premium-financed life insurance goes wrong. The column is built around seven "expensive sins"; pride and greed are the two it develops.

The author cautions that premium financing can work with the right client, policy, financing arrangement, assumptions and ongoing management. Having yet to see one work does not mean such cases don't exist, but when the transactions get into trouble the cost can be financially devastating.

Pride becomes expensive when successful clients cannot admit a bad decision. Premium financing compounds that reluctance because the transactions are complicated, and the client may have been surrounded by impressive professionals, sophisticated presentations and illustrations showing attractive long-term results. The question shifts from whether they would still enter the deal today to how they prove the original decision was right. At that point, the exit strategy becomes less attractive.

The author's recommended fix is to put the transaction under independent scrutiny rather than to unwind it automatically. If the analysis confirms what the client was told, the fee was cheap insurance; if it does not, it may be the best money they ever spend.

Greed starts with a seductive pitch: why use your own money when you can use the bank's? There is nothing inherently wrong with leverage, the author writes, but leverage is not magic, and the strategy generally depends on a spread between borrowing costs and policy performance.

Leverage is as effective at magnifying a disappointing outcome as a favorable one, and the strategy should not require optimistic assumptions to justify its existence. Illustrations that pair attractive crediting rates with favorable loan terms and decades of compounding can make the right side of the ledger look enormous. A $10 million arrangement invites a $20 million version, and five years of financed premiums invite ten.

For advisors, the two themes converge on who performs the review. If the client's own attachment to the original decision is part of the cost, an analysis commissioned by someone with a stake in the financing or the policy likely cannot supply the skepticism the situation calls for. That suggests the review belongs with an advisor or analyst who is not paid on the transaction. The author's test is simpler still: ask whether the client, seeing the arrangement for the first time today, would enter it at all.