Case Study: Premium Financed Life Insurance - Expectations vs Reality

Case Study of a Popular Premium Finance Life Policy and Plan Offered in the Past 10 Years

Premium financing can be an excellent strategy for purchasing life insurance, whether the goal is to maximize the death benefit or accumulate cash value. It's akin to purchasing another asset, such as real estate, where you have the option to pay in full or use financing to assist with the purchase. However, as with any investment, there are inherent risks. If the underlying asset underperforms or fails to appreciate in value, these risks become more pronounced.

Unfortunately, many individuals who were sold premium-financed life insurance policies are discovering years later that their policies are not performing as expected, necessitating significant adjustments.

We want to highlight one particular case to caution others and underscore the importance of seeking at least a second opinion. It's crucial to review such policies annually to ensure they are performing as expected and remain on track.

In this very popular (if not the most widely sold premium finance design) case, the policy was initially sold as a straightforward plan, appealing to the client because it was "simple to understand and not too complicated": contribute for five years and then enjoy a substantial, tax-free income for life. The illustrated benefits seemed very promising. However, the original pitch and illustration were intentionally oversimplified, hiding several cautionary factors that could—and ultimately did—negatively impact the outcome five years later. Despite the favorable conditions from 2018 to 2023, with generally low interest rates and a strong stock market, the policy still underperformed. This situation underscores the importance of thorough, ongoing evaluation for anyone considering or currently engaged in a premium finance strategy.

Premium Financed Life Insurance Actual Example - The Expectations vs Reality Outcome 5 year Later

Original Illustration Pages Used as Part of the Original Sale Presentation Back in 2018 (EXPECTATIONS):

The client will contribute $43,500 annually for the first 5 years. Simultaneously, they will begin borrowing in year 1, continuing through year 15. The plan is to pay off the loan using the policy’s cash value by year 15, ideally leveraging the accumulated growth to settle the debt while maintaining the policy's benefits.

Summary Page of the Illustration and Sales Presentation: Without Premium Finance & With Premium Finance Returns

Summary Page from the original illustration and sales presentation

Illustration Page of the Original Policy and Premium Finance Design in 2018

Five years later, in 2023, the in-force illustrations show a significantly different result. The initial illustration projected a net income of $78,000 at age 67, in year 16, but it is now on track to be only $47,000. This is an almost 40% missed (REALITY)!

5 Year Later Inforce Illustration - Do you see all the differences compare to the original?

Here are some of the main issues with the policy: Over time, the product's caps, rates, and charges became less favorable, eroding its performance. Additionally, the financing structure turned out to be less flexible and advantageous than initially presented, even though the market performed well overall. These changes significantly impacted the policy's effectiveness and the client's expected outcomes.

A Premium Financed Life Insurance Policy may sound great, but the Expectations set by the insurance professional (agent, broker, or financial advisor) is often far from Reality (Exceptions vs Reality)! It's often why Life Insurance Illustrations are often refer to being "Illusions."