PPI has remained active in the collateral loan niche even after the 10-8 strategy was shelved. Its subsidiary PPI Advisory’s approach runs counter to that of the immediate financing arrangement (IFA).
“We do leverage loans differently,” says Claude Ménard, senior vice-president, Marketing, Canada, at PPI Advisory. “We do not agree to finance 100 per cent of the premiums, like some insurers do. Instead, we finance the cash surrender value (CSV) of the policy, not the premium. You borrow on your real assets, and the value of the insurance contract can support the loan,” he explains.
Ménard frowns on using collateral to boost financing to 100 per cent of the premium, as some banks do. If the customer pays a premium of $1,000 and the CSV of the contract is $500, the bank will ask for another guarantee to fill the gap. “How much does it cost to lock in an investment as an additional guarantee with a bank?” he says.
What’s more, immediate financing arrangements are annual renewable agreements because they are essentially loans, Ménard adds. Yet policies used as collateral span 20, 30, or 40 years. This poses a risk, he says. “It is impossible for the terms foreseen in the initial agreement to last this long.”
He would like to see more information on IFAs in case of a negative scenario including the consequences of ending the agreement. Insurers are portraying IFAs as a source of liquidity, but Ménard says a sensitivity and flexibility analysis is crucial. “What will happen if the credited rate for the participating account in the whole life insurance policy used as collateral decreases and the loan rate increases? Today, the economic environment is favourable but that will not always be the case,” he warns.
Diane Hamel, assistant vice president, Regional Tax, Retirement and Estate Planning Services at Manulife, agrees that the strategy is not risk-free. “The loan is at a floating rate and its conditions may evolve over time. You need to be a seasoned borrower. The IFA is a solution intended for affluent and well-informed customers often in their late 40s or early 50s. They must understand the risks and advantages of financial leverage, and have a long investment horizon. Among the advantages, holders can obtain insurance coverage while retaining their liquid assets. ”