Worldwide: Wealth Structuring 20:20 (2015) Edition II Article: Premium Financing

Last Updated: 13 May 2015
Article by Brad Adderley

Premium financing takes off in Asia

For more than 20 years, high net worth individuals around the world have been using premium financing to help them buy life insurance more efficiently. But though not a new product, this little-known tool for freeing up capital has seen its popularity rocketing in the last few years, particularly as demand moves beyond North America and Europe into the growing wealth centres of Asia and beyond.

Wealthy individuals need to acquire life insurance for all sorts of different reasons, whether to address inheritance and estate planning, to deal with a corporate buyout and sale, for tax reasons, or because they need key person insurance. Premium financing allows them to do so at no, or minimal, cost, by arranging financing from a third party to cover the cost of the policy premiums.

Premiums for über-affluent individuals tend to be higher amounts given the larger nominal amounts required, and people are never particularly keen on the idea of liquidating assets in order to pay for them. Instead many now choose to continue to grow and protect their wealth by keeping it invested in the assets of their choice, where they think they will make the best returns, and asking a bank to pay their life insurance premiums.

Most premium financing is structured through Bermuda, as the world's largest offshore insurance centre. Typically a Bermuda carrier will issue a Bermuda product to a Bermuda trust, and the trust will buy a policy of which the high net worth individual is a beneficiary.

Brad Adderley, a partner in the insurance team at Appleby in Bermuda, says: "Premium financing as a technique has been around for a long time, but we now see a lot more people using it, particularly in Asia and Latin America. In those centres there is a lot of new money looking to these tried and tested methods for financing jumbo policies."

There are two types of banks offering premium financing today. First are the non-relationship banks, which do not have ongoing involvement with the individuals taking out the policies and loans, but are instead focused on providing the financing and earning profit on the interest and fees.

Relationship banks

The second group is the relationship banks, which charge lower fees because they focus on building a relationship with HNWIs and premium financing is just one of a pallet of services they offer: "We work with a host of private banks based and operating in Asia that offer this type of relationship bank premium financing," says Rupen Shah, Senior Associate in Appleby's Hong Kong office.

There may be an arrangement between the insurer and the bank whereby the premium amount from the policy will be held by the bank to be used for making investments. Or the insurer and the bank might enter into a discretionary management agreement to allow the bank to act as an investment manager investing on behalf of the insurer. Either way the customer will receive a rate of interest on expiry of the policy, or on a fixed basis.

Karl Lupson is Chief Operating Officer at Valor Management Ltd. He says: "With premium financing, the client is essentially paying a quarterly loan interest sum for a large amount of life insurance coverage, while the client's private bank is investing the client's money in higher yield investments."

Why offshore?

Jay Judas, Senior Vice President, International Business Development at BF&M Insurance Group says clients are attracted to offshore jurisdictions for their insurance for a variety of reasons: "If you take a look at local insurance markets around the world, it's not usually possible to get very high face amounts. When looking at insurance in a local currency – which isn't as sound as the Euro, the pound or the dollar – high net worth individuals often conclude they need to have high amounts of death benefits in a stable currency, in a stable economy. The offshore jumbo insurance space is an emerging niche market, precisely because it enables these individuals to access a large face amount in a safe jurisdiction."

Adderley says: "Bermuda has always been the largest offshore insurance centre, and as it increases regulation it enhances its reputation. In the insurance space in particular, Bermuda's reputation on know-your-client, anti-money laundering and so on has made it even more attractive to those people buying these large policies."

In terms of the security, at the very least a bank will require the borrower to enter into an assignment to its rights under the policy, including the cash surrender value in favour of the bank. But even while the insured still has to pay interest on the loan that is covering their premiums, and put up collateral, the mechanism of premium financing allows HNWIs to keep money working in investments of their choice.

HNWIs may incorporate a BVI company to act as borrower in the premium financing structure, which in turn can allow them a direct involvement in the decision as to which underlying assets and investments the policy invests into.

Premium financing can work well for whole life, universal and indexed universal life insurance policies, and can also help individuals who have trust-owned life insurance and want to reduce annual commitments or save on associated taxes.

With the growth in demand, the number of products on offer in Asia is increasing, and competition is leading to better deals for purchasers. Shah says: "With the continuing growth of premium financing, in terms of volumes of transactions, types of insurance products being purchased, geographical spread and the increase in HNWIs globally, there is a good likelihood that substantially more focus will fall on these transactions in the future."

He concludes: "This is likely to translate into greater competition between lender banks in the future, and corresponding pressure on interest rates and fees levied."

Originally published in Wealth Structuring 20:20, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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