TorkLaw Assists Investors Facing Losses from Premium Financed Life Insurance Policies
TorkLaw is actively representing investors across the United States who have experienced financial losses in premium financed life insurance and other complex investment strategies. Recently, premium financing arrangements for life insurance have gained popularity due to a prolonged low-interest-rate environment. Presented as a method for enhancing death benefits and accumulating wealth with minimal out-of-pocket expense, these strategies have faltered significantly as interest rates rose between 2020 and 2023, causing substantial financial setbacks for many insured individuals.
If you purchased a life insurance policy tied to a premium financing arrangement without fully understanding the risks, TorkLaw invites you to call us at (888) 845-0484 or reach out via email at info@torklaw.com for a free, confidential consultation to explore your legal options.
Understanding Premium Financed Life Insurance
Premium financed life insurance involves securing a loan from a third-party lender to cover the insurance premiums. The lender pays the premium, and the insured is responsible for paying interest on the borrowed amount, typically with the goal of retiring the loan over a set timeframe, such as ten years. Ideally, the cash value growth of the life insurance policy is sufficient to repay the loan at the end of this period.
However, rising interest rates or lower-than-expected policy performance can lead to unexpected collateral calls from the lender. If the insured cannot meet these calls, they risk default, which can force the lender to stop paying premiums and potentially cause the policy to lapse. These arrangements add further complexity to life insurance policies, which are often used to offer financial security and peace of mind.
Why Premium Financed Life Insurance Has Created Issues for Policyholders
The life insurance industry’s commission-based structure encourages brokers to recommend larger policies with high upfront premiums, as they typically receive substantial first-year commissions. This commission model sometimes incentivizes brokers to promote policies with high premiums that may not align with the insured’s long-term needs.
Since insurance policies can be intricate, policyholders often rely on their brokers to explain policy features and associated risks. In some jurisdictions, brokers act as fiduciaries, meaning they must adhere to a higher standard of care, including fully disclosing any significant details about a proposed policy and related strategies.
Before issuing a policy, brokers are required to provide the insured with an insurance company-prepared illustration that shows expected policy performance. Frequently, brokers present optimistic projections. If real-life outcomes don’t match these assumptions, the policy might underperform, potentially requiring additional cash contributions from the insured.
In premium financed arrangements, borrowing costs introduce another dimension. While most insurance companies do not include third-party borrowing projections in their policy illustrations, brokers are expected to disclose this information, which can sometimes lead to oversights. Some brokers, motivated by commission, highlight only the most favorable scenarios—where policy returns are high and borrowing costs are low—without addressing potential adverse market conditions or rising interest rates.
The Impact of Rising Interest Rates
After years of historically low interest rates, many brokers continued to recommend larger policies with premium financing to keep apparent costs low. For clients, premium financing arrangements meant only paying interest on the loaned premium amount, making these policies seem more accessible. However, the pitch often failed to capture the effects of interest rate increases, policy performance variability, and changing market conditions.
The Federal Reserve signaled its intent to raise interest rates for some time, but many brokers disregarded these warnings. As rates rose from below 3% in 2020 to over 7.5% in 2023, the low-cost appeal of premium financing faded, creating a situation known as negative arbitrage, where borrowing costs outstrip policy returns. Many policyholders are now facing collateral calls from third-party lenders. Unable to meet these calls, some have lost not only the life insurance policy itself but also the cash value, premium payments, and death benefits. Insufficient or misleading disclosures may provide the basis for legal action against those responsible.
TorkLaw’s Commitment to Helping Investors
If you purchased a life insurance policy tied to a premium financing arrangement without fully understanding the risks, please call us at (888) 845-0484 or reach out via email at info@torklaw.com for a free, confidential consultation to explore your legal options.