In order to determine whether or not partial recourse premium financing gives a senior any real exposure, there are some terms that you need to become familiar with. The first term, of course, is “partial recourse.” Partial recourse is a clause that is included in the sales contract between the lender and the senior (the borrower) that stipulates that if the borrower defaults on the loan, the borrower is responsible for the repayment of a percentage amount, usually 25% of the loan immediately, including the cost incurred by any problems between the buyer or investor who may be in current possession of the loan. You see, lenders commonly sell loans to investors. The lender wants to be sure that a default on the loan does not leave them or their investors without the money that was lent, so they include this clause that compensates them with an agreed-upon portion of the losses. In short, partial recourse is the course of action taken against the borrower if the borrower somehow defaults on the loan. In this case that would be the loan that they are using for their premium finance life insurance policy, and the risk of default is close to zero.
The second term to be familiar with is “financial exposure.” Financial exposure is the amount of money that you leave yourself exposed to loss. Seniors looking to get life insurance want to minimize the financial exposure that their loved ones will be faced with at the time of death. Insurance minimizes the negative effects of financial exposure by taking away a percentage of that exposure in the form of reimbursing funds through the payout of insurance policies. Your financial exposure describes the amount that you stand to lose in the case of an unpredictable event. Ideally, people are looking for as much coverage for their financial exposure as possible with as small of a deductible and premium payment as possible. Generally speaking however, the more exposure you protect yourself against, the more you will have to pay in premiums or deductibles.
Now that the terms have been explained it is easier to answer the question of “Does partial recourse give a senior any real financial exposure?” The answer in almost all cases is: “No.” If a senior dies during the first two years of the policy, the proceeds from the policy go first to pay back the loan, and then the bulk of the policy is distributed to beneficiaries.
At the two-year point, the senior can choose to keep the policy by repaying the loan. If the senior’s health has deteriorated to the point that he or she could not qualify for a replacement policy, this may be an attractive option. However, whether or not the funds are available depends on the individual financial circumstances of the borrower of the loan. If the borrower has the funds to pay back a loan in full and then make the regular premium payments, there is no need to worry about partial recourse because the likelihood of default on the loan is low. If there are no defaults on the loan than there is no financial exposure to the negative effects that can result from borrowing what cannot be repaid. Furthermore, those who are applying for premium finance life insurance must have at least two million dollars in insurable assets to apply for the minimum two million dollar policy. If they have their finances in order, not only will they have obtained a loan with terms that they can live with, but they will also have the funds to pay off the loan if there was some reason to keep the policy, or in the unlikely event that the partial recourse clause of the agreement were to take effect.
Seniors without the financial ability to repay the premium finance loan can sell their policy in the secondary market for enough money to pay back the loan and generate a substantial sum for themselves or their beneficiaries.
So the real financial exposure risk in partial recourse financing is very small. If the senior borrowing can liquidate or come up with the assets that would be required in order to pay the loan for the premium policy back in full, it is zero. If the policy is sold to repay the loan, the real financial exposure also is zero. Only in the case of a senior who wants to keep the policy, but does not have the means to repay the loan, would there be a problem. But rather than let the loan default, the senior would give up their desire to keep the policy and sell it.