Premium finance seekers should anticipate, however, that a financed policy may have limited marketability, and that a sale of the policy may not offer sufficient funds to pay off a loan. So it will be important for them to come up with an alternative exit strategy.
Those seeking to sell their policies must also change their expectations about how much they can get for them. Investors are now going to be far more selective and will likely lower their prices. They will also look more closely at the insured's life expectancy and medical reports. The increased scrutiny means transactions may take longer, as investors will likely use more exhaustive due diligence procedures to confirm the validity of a policy. The process will take even longer if the policy is financed, if there are any inaccuracies or blanks in the original insurance application, or if there are any other discrepancies in the information provided to the policy buyer. It may be more common for insurance trusts selling policies to use corporate trustees because of the increased potential for liability exposure.
Finally, individuals acquiring life insurance will want to preserve its potential investment value by ensuring full and accurate disclosure on their insurance applications, particularly regarding their net worth and the source of the premium payments (if it comes from premium financing, for example). Individuals should avoid any transactions where there is an up-front payment or some other inducement to purchase the policy. They should also be wary of any agreement or understanding to sell or transfer the policy to an investor from inception. These "schemes" could make policyholders and/or insureds personally liable, since carriers are actively challenging fraudulent insurance transactions and targeting all parties involved.
Jonathan M. Forster is the national chair of the wealth management group and the co-chair of the insurance regulatory and transactions group at Greenberg Traurig LLP. Jennifer M. Smith is an associate at Greenberg Traurig LLP.