John and Jane Doe, an extremely wealthy couple, met with their insurance agent who advised that $10 million in life insurance coverage would be appropriate given their financial status and estate planning needs. He recommended a whole life policy that earned dividends and accumulated cash value. Given the couple's age and health concerns, annual premiums for the policy were determined to be approximately $275,000.When the Does advised the agent that they were unable to pay the premiums out of pocket and unwilling to liquidate substantial portions of their investment portfolio to do so he recommended premium financing. Under the plan he outlined for the Does, premiums for the first few years could be borrowed, with future premiums paid by accumulated cash values of the policy. The agent backed up his recommendation with a professional presentation provided by the premium financing company, and the Does agreed to finance the premiums for the first five years of the policy.
Five years later the Does, having incurred loans of over $1.6 million plus interest, discovered that the policy's earned dividends were insufficient to pay the premiums on an ongoing basis, and filed claims against the agent, the carrier, and the financing company. Although the agent responded that he had not guaranteed any level of accumulated cash value or that it would be sufficient to pay premiums after five years he was able to produce no written documentation other than e-mails characterizing the financing scheme as "solid" and "extremely reliable".
Risk Management Tips:
Claims related to premium financing generally involve relatively large amounts as the involved policies have high limits and premiums to match. In many cases collateral is aggressively sought by the financing company and often ultimately lost. Given the foregoing, full disclosure of the risks and mechanics of the transaction must be made to the client and comprehensive documentation provided and maintained by the agent. Agents should consider requesting involvement of the client's own legal counsel to ensure that the financing structure is proper and understood by the clients. Doing so will provide additional protection to the agent in the event of a claim. Bear in mind that in many jurisdictions promoting premium financing may be considered as creating a special or fiduciary relationship with the client which may in turn serve to elevate the agent’s professional standard of care and disclosure.
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