Many analysts are predicting interest rates will skyrocket in the next two to three years, and that should also be a very big concern for someone in Sam's shoes, says Certified Financial Planner James Holtzman, an adviser and shareholder with Legend Financial Advisors, in Pittsburgh.
"Most of the time a premium finance loan will have a variable interest rate," he says. "Right now that's a great thing. But when (interest rates) rise, it could really eat into the advantages you were trying to accomplish in the first place. What if the cash value is not increasing as fast as the interest rate?"
If the interest rate goes a lot higher, says Gnad, Sam could end up owing more for the premiums than the policy is worth.
Another concern, Holtzman says, is the credit quality of the company that writes the policy. If there's a downgrade, the lender may not pay additional premiums, or it may call for the loan's collateral.
Lucrative business
Large insurance policies mean large commissions, Kennedy says, and that opens the door to outright fraud. "Nowadays," he says, "with tight credit markets, unscrupulous agents are preying on the elderly. They tell them that in two years they can sell the policy and make money on the deal. Generally insurance companies have a two-year contestability period during which they can refuse to pay the claim if they suspect fraud."Gnad says most insurance companies will not issue a policy to someone whose sole purpose is to resell it for profit. To get around this, unscrupulous agents advise applicants with this strategy in mind not to disclose it on the application or to indicate other intentions, such as estate tax planning. Insurance companies, he adds, are becoming more vigilant about cracking down on this type of abuse.
So while premium financing is a viable strategy in some cases, says Holtzman, "we try to keep it simple. If you want insurance, go to an insurance company; if you want to get financing, go to the bank."
A better option, he says, might be a home equity loan. "You should be able to write it off on your taxes, and you'd be dealing with a locked-in rate that is very attractive these days.
"Or just get a personal loan from a bank."
Premium financing, says Kennedy, is "a way for a life insurance agent or premium finance company to make huge fees and commissions, but it could leave the client who signed for the loan holding the bag."
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