When your clients think of life insurance, they likely focus on the premiums and the death benefit. That’s understandable. But something else can help provide additional benefits to those with permanent life insurance: insurance lending.
To help your clients take advantage of that, it’s important for you to understand this strategy and unravel the myths surrounding it.
For advisors, the main components of their practice are insurance and/or investment advice, not loans. Some may be hesitant to broach the subject of lending with their clients.
In the first instalment of this series, we talked about how permanent life insurance contracts can offer opportunities for convenient lines of credit. Policyholders can use the cash surrender value of their contract to secure a credit line that offers flexibility and helps with cash flow.
Those are the basics. Sometimes, advisors may not be aware of the possibilities insurance lending can bring. Or, if they are, they can be unsure of some of the nuances and reasons for using this approach. Let’s address eight misconceptions.
- Wealthy individuals don’t need to borrow money because they have money. Actually, wealthy clients often look at the strategic use of borrowed funds. They’ll consider the interest rate of the loan vs. the opportunity cost as well as the tax ramifications. To access cash conveniently and quickly, insurance lending can be one prudent strategy.
- Insurance lending is expensive. No, it’s among the least expensive lending available to clients in terms of interest rates. While there are some initial set-up costs, typically the lower interest rates on these facilities make them very attractive.
- Clients have to take on more debt. The line of credit is there if and when they need it. If they aren’t tapping into that line, it doesn’t cost them a dime in interest. Using debt, especially in this low-interest rate environment, can be a smart way to help maximize available capital. Affluent clients are choosing to, instead of having to, take advantage of insurance lending.
- Insurance lending is risky. This option has been available for over 20 years. Clients have flexibility and the comfort of knowing that the facilities are fully secured with cash.
- Clients must go to the insurance company for a policy loan. The insurance company that issued your client’s contract often has a policy loan option. However, financing organizations have made arrangements with insurance companies to allow clients to use their cash surrender value as security for a line of credit. Manulife Bank, for example, can offer insurance lending to all the major insurance companies operating in Canada.
- Insurance lending affects clients’ ability to borrow money to run their business. Our insurance lending solutions don’t report to credit bureaus. Still, clients should always disclose all their debts to lenders when applying for credit. Once lenders understand the nature of insurance lending, they generally don’t have an issue with these facilities being in place. We’re happy to talk to any client’s lender to help them understand the nature of insurance lending.
- Insurance lending suits only affluent clients and business owners. Some solutions are geared toward these segments. But many clients can participate in insurance lending with as little as $33,000 in cash surrender value.
- Clients don’t have to qualify for the loan. They do, even with the cash surrender value as the security. Most insurance lending solutions require evidence of debt servicing and/or a satisfactory credit history.
Advisors don’t need to know all the ins and outs of insurance lending. They need to know just enough to introduce the subject to clients, make a recommendation and bring in the experts to fulfill the insurance lending facility.
To learn more, visit the Manulife Bank Advisor Portal.