Fintech opens up a new market for banks: lending against life insurance

Many people buy whole life insurance as protection for their beneficiaries after death. Josh Wyss also sees it as a savings vehicle during his lifetime.

Unlike term life insurance, which covers a specific period of the insured’s life, full-life policyholders can borrow against the cash value of their policies when they need income. Money is not taxed as it accumulates within the policy, nor is it taxed when it is borrowed.

“Particularly people who don’t have their whole life themselves think that people go into life-long politics thinking only of the death benefit,” Wyss said. “It just isn’t true.”

After borrowing for his life insurance for 12 years, Wyss has found plenty of room to improve the process.

For both the user and the provider, “It’s very painful,” he said. “There is no technology and it takes a long time to create one of these lines.” So painful, in fact, that the bank he borrowed from informed him in March 2020 that he would not renew his line of credit and would withdraw completely from the market.

“They said that the origin, assistance and management of guarantees are cumbersome and manual, mainly because it is necessary to interface with whole life vectors with ancient systems, and the amount of people who have had to entrust this activity over time to administer it. it got cumbersome, Wyss said. “That was an ‘aha’ moment for me.”

Wyss co-founded a fintech called Inclined which helps banks participate in this form of lending. Although the business poses extremely low risk to the lender, as the cash value of the policy acts as collateral, Wyss’ research found that only a few banks in the country underwrite lines of credit against whole life policies. He estimates that 90% of the market for these loans is conducted through the life insurance company.

Inclined, which on Friday announced it has raised $ 15 million in its Series A funding, aims to solve this problem for banks. It already has Mechanics Bank, in Walnut Creek, California, on board, and two or four more financial institutions are expected to launch in the coming quarters. Some are drawn to the lossless feature of the loan, while others hope these loans will create new customer relationships, according to the company. Wyss believes banks are better equipped than whole life insurance companies to make these loans because they have a lower cost of funds than mutually organized insurance companies.

“We are looking for banks that want to make this line of business scalable,” said Amir Friedman, chief capital officer at Inclined. “These are banks that have an interest in supporting a new division of consumer credit.”

Mechanics Bank, with assets of $ 18.6 billion, is both an investor and a launch partner of Inclined.

“The deeper we delved, the more we liked it from the bank’s point of view,” said Carl Webb, president of Mechanics. Beyond the low risk of losses, “We need an under-served market in the consumer loan space. It’s a truly unique space.”

Inclined’s software will sit between whole life carriers, currently Northwestern Mutual and MassMutual, and financial institutions. Full-life advisors will invite their clients to the Inclined portal, where clients can apply for a loan guaranteed by their full-life policy. Inclined performs compliance and regulatory checks and ensures that there are collateral to back up the credit line, while the financial institutions that Inclined partners with on the other side originate the loans on their balance sheets. Financial institutions will approve the credit policy and exercise control over it.

“These are not loans originated and sold to a bank because they are not term loans,” Wyss said. “They are dynamic lines of credit that survive for years as long as the customer wishes.” Inclined’s software does not have the ability to charge fees, including origination fees, fees for delays or collections. Fintech will earn money by charging platform fees to its financial institution partners.

However, there are disadvantages for the consumer or his beneficiaries. If the policyholder dies before repaying the loan, the insurance company will reduce the death benefit by the amount due.

As a launch partner, Mechanics helped Inclined design its banking partnership risk management and compliance framework.

“They brought the piece of technology, we brought the budget and the blueprint for a bank-grade asset,” Webb said. “We are in it because we like the asset class, the risk profile and the ability to scale it.”

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