Have you suffered significant financial harm due to the purchase of a premium-financed universal life insurance policy?

Have you suffered significant financial harm due to the purchase of a premium-financed universal life insurance policy?

Some life insurance policies, in addition to providing financial compensation upon the insured’s death, accumulate cash value over time.  This cash value is based on the premiums paid and, for insurance products with an investment component, the investment performance of the premium dollars. When a policy has an investment component, there is ordinarily a “separate account mechanism,” meaning the cash value is placed in a separate account for investment purposes; the funds in that account belong solely to the policy owner.

One type of life insurance policy with both a death benefit and a cash value is universal life insurance. Universal life insurance policies have adjustable death benefits and flexible premiums, meaning the policyholder may vary the death benefit and premium. Additionally, once the policy’s cash value has generated enough income, it may fully fund the policy’s premiums, and no further premium payments are needed.  A variant of universal life insurance is known as “indexed universal life insurance”, generally meaning that the cash value in those policies would accumulate according to an external index, such as a stock market index.

Some customers, who may be interested in purchasing a universal life insurance policy or an indexed universal life insurance policy, are told by their broker or financial advisor to use “premium financing” to fund their annual premium payments.  Premium financing, generally, is a funding mechanism in which the customer obtains a loan from a third-party lender in order to pay premiums.  Premium financing does not change the underlying insurance product. But if a policy is purchased using premium financing rather than liquid assets, the accumulated cash value of the policy (once it has generated sufficient income in later years) can pay off the premium finance loan. The cash value of the policy may also be used as collateral for all or some portion of the premium finance loan.

A sophisticated customer may determine that purchasing a premium-financed universal life insurance policy is in his/her family’s best interest.  In our view, this determination can only be done with the separate assistance of both financial and estate-planning experts who fully understand and can properly advise a customer about these extraordinarily complex insurance products.  However, the devil is in the details.  Overly optimistic life insurance illustrations or “illustrations” and/or a failure to properly explain how these products work, can lead customers to purchase a premium-financed universal life insurance policy that is not in their best interest and essentially can operate as a financial trap.  Further, the sales commissions for these products can be very lucrative, and unscrupulous brokers or financial advisors may mischaracterize these products or gloss over the details in order to reap a large payday.  Sometimes these complex products are just vaguely pitched as a “tax shelter” or a “retirement plan” to customers.  Also, the use of premium financing may lead unsuspecting customers to commit to paying an annual insurance premium that they truly cannot afford.  Further, customers may be required to pledge assets or securities as collateral for the loans to pay the premiums, which may be subject to margin calls and/or forced liquidations down the road.

If your broker or financial advisor recommended that you or a loved one purchase a premium-financed universal life insurance policy, or a premium-financed indexed universal life insurance policy, and you have suffered significant financial harm,  call the attorneys at Epperson & Greenidge for a free consultation at (877) 445-9261 or contact us on-line.