Don’t leave clients in the policy-loan lurch

Agents who tout the benefits of taking loans against a life policy’s cash value must watch out for pitfalls

Don’t leave clients in the policy-loan lurch

Among insurance agents offering whole life insurance to clients, one popular pitch involves how policy holders can take loans against the cash value of a policy. But while it could prove to be a useful strategy for objectives like retirement planning, a critical risk can materialize from a commonly committed mistake.

“Our non-scientific data … indicate that the mutual carriers’ whole life products are the most borrowed against and also the most difficult to remediate,” wrote Anthony Giannone, a partner at CPI Companies in the U.S., wrote in InsuranceNewsNet Magazine.

The problem, he explained, generally begins when clients in financial stress take loans from their policies — a tempting idea during economic downturns, market declines, emergencies, or other instances that require a back-stop for cash flow. They may also do so to supplement their retirement income, or address other purposes such as deferred compensation.

“[T]he reality is most mutual company salespeople encourage their clients to purchase multiple policies and repeat this process,” Giannone said.

Things take a turn for the worse when clients continue to take on such loans, labouring under the mistaken notion that taking loans from their insurance policies is like drawing from a font of free cash.

Compounding the problem, Giannone added, is the fact that “many agents who sell these plans forget to monitor those loans to make sure clients do, in fact, either repay them or plan for the potentially negative tax implications, if they don’t.” In-force illustrations that show projections of the policy not lapsing can also set the stage for a tragic misunderstanding.

As the different factors snowball, it can get to a point where clients’ policies are so deep underwater that they’re impossible to rescue. Clients find themselves at a painful crossroads: either they lose the coverage and incur a massive taxable gain, or they get a death benefit so markedly discounted that it can’t possibly fulfil their needs.

They may try to iron things out directly with the insurance carrier, but are likely to become frustrated at dealing with policy-service representatives who don’t have the training to handle such issues.

“If there is a clear message to agents it is this: If you see clients starting to take loans to pay premiums, do not assume they are suddenly going to repay the loan or start making premium payments,” Giannone stressed. “Now is the time to review your client’s policies, before their health issues limit their options.”