Goheen Insurance: Securing Legacies with Expertise and Integrity.


The Art of Using Borrowed Money to Pay for Life Insurance

By Allison Bell

Clients with a net worth over $2.5 million might be candidates for premium financing or related strategies. By borrowing the money they use to pay for the large whole life or universal life policies used in estate planning, they can free up cash that can go into other investments.

Skeptics contend that leverage lets some clients get in over their heads. But Shawn Goheen, a partner at Goheen Insurance, contends that premium finance can be a powerful tool for clients with advisors who help them ask the right questions.

“You must make sure whoever you’re working with as a partner is shopping the bank, giving you a clear understanding that they’re looking at the whole market,” Goheen said in a recent interview. Goheen’s firm, Goheen Insurance, is a Sugar Land, Texas-based firm that started up in 1990 and is now part of Simplicity

The firm sets up life insurance arrangements, including premium finance arrangements, for clients with large and complex needs. The firm manages $1 billion in premium finance life insurance and has relationships with about 20 lenders and insurers.

Each lender might offer two or three separate programs, and Goheen said simply understanding why the programs are different takes work. ”Seeking thorough explanations will ensure you know exactly what you’re getting,” he said.

He believes in thinking hard about how clients will pay back their loans and analyzing how the loans might perform in a wide range of stressful scenarios over long periods of time.

He answered questions about variable interest rate provisions in premium finance via email. His comments have been edited.

How do you see the role of banks and other types of lenders, such as lenders backed by private equity firms, in this market?

Shawn Goheen: 

When you’re seeking financing from banks, it’s important to prioritize stability and lending capacity. Generally, I advocate for working with banks over a private lender due to their stability and reliability.

Relying on equity groups for borrowing is typically not advisable, due to the inherent risk involved, such as the potential for groups to go out of business or declare bankruptcy.

But banks have pulled back, despite their profitability.

They’re increasingly cautious about what the reserves look like and how much money they’re putting into the market.

State regulations govern banks, and banks are required to maintain adequate reserves proportional to lending activities.

It’s important to understand the strength and ability of banks to fulfill lending obligations. If they can’t, they can opt to exit, potentially leaving hundreds of loans needing relocation to other institutions.

Why do you say that working with equity groups may be riskier?

Equity firms have entered, and exited, this space. Notably, two companies have gone bankrupt and left the space.

These firms aren’t receiving financial gains like banks, making them less desirable to funders.

What kinds of fixed rates can the premium finance clients get these days?

The range of fixed rates varies widely, with recent drops over the last 30 days, ranging from 6.25% to about 7.5% across various banks.

Specific rates can differ depending on whether it’s an annual, variable, or fixed-rate.

Clients must explore multiple options to understand current loan rates and potential discounts available based on their banking relationships or holding a U.S. bank account.

Each bank has different rates depending on the client’s standing with that bank, their wealth, and deposit amounts.

What’s the typical range for variable rates?

The range of variable rates varies; however, it’s typically between 6.70% and 7.70%.

This depends on a bank’s capacity and what its profit margin looks like.

Who provides the variable-rate financing?

Most of the financing for variable interest rate provisions — approximately 99% — comes from banks, while around 1% could come from equity groups.

Are there any other factors that make one premium finance lender different from another premium finance lender?

One main difference is the collateral that you may have to post.

Let’s say you have a 0% rate of return on the policy, and you borrowed $1 million. They will ask you to put in $300,000 above that. That’s $1.3 million of collateral that you might have to post.

Even though your cash value is $1 million, you’d still have to put an extra $300,000 for protection on the interest rate since variable rates could fluctuate monthly.

What happens to the collateral requirements when interest rates change?

These provisions may be structured to change every 30 days or operate at different intervals, such as quarterly or annually.

It’s important to understand that, with variable rates, there’s increased exposure.

Therefore, ensuring collateral is in place to mitigate potential risks is important, especially if the market experiences upward movement.

Some banks require posting collateral beyond what’s necessary, but financial professionals might overlook this.

When the market goes up, you take on more risk at that variable rate. If it goes down, there is typically a floor to limit how far it can decrease.

It’s also important to understand that adding in hedges, such as swaps, can offer protection on the back-end side, but you must be cognizant of what variable you use due to the potential expense involved.

How much has the structure of typical variable-rate provisions changed?

Variable-rate provisions have evolved over the past couple of decades, primarily due to the introduction of longer fixed-rate periods.

There’s a diverse range spanning one, three, five, seven, and 10 years, each with distinct rate provisions.

Additionally, variable rates offer monthly, quarterly, and one-year terms, providing a variety of options to choose from based on your financial situation.

The most important thing is to stay informed about what the banks offer, so you can remain aligned with the markets and various loan offerings.

Shawn Goheen. Credit: Goheen Insurance