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

Many people buy full life insurance to protect their beneficiaries after their death. Josh Wyss also sees it as a means of savings during his lifetime.

Unlike term life insurance, which covers a specific period of the policyholder’s life, policyholders can borrow for the entire life at the cash value of their policies when they need income. The money is not taxed as it is compounded within the policy, nor is it taxed when taken out as a loan.

“Especially people who don’t have a whole life of their own think that people have a lifelong policy thinking only about the death benefit,” Wyss said. “That’s just not true.”

After borrowing against his life insurance policy for 12 years, Wyss has found a lot of room for improvement in the process.

For both user and provider, “It’s very painful,” he said. “There is no technology and it takes a long time to set up 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 credit line and would withdraw from the market entirely.

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“They said that the creation, maintenance and management of collateral is cumbersome and manual, especially because you have to interact with carriers of lifetimes with old systems, and the number of people they have to throw at this business over time managing it became impractical,” Wyss says. “That was an ‘aha’ moment for me.”

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

Inclined, which announced Friday it had raised $15 million in its Series A financing, aims to solve this problem for banks. It already has Mechanics Bank, in Walnut Creek, California, on board, and is expected to launch two to four more financial institutions in the coming quarters. Some are attracted to the loss-free feature of the loan, while others hope these loans will build new customer relationships, the company said. Wyss believes that banks are better equipped than life insurance companies to provide these loans because they have lower financing costs than mutually organized insurance companies.

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“We’re looking for banks that want to make this a scalable industry,” said Amir Friedman, Chief Capital Officer at Inclined. “These are banks that have an interest in establishing a new consumer lending division.”

The $18.6 billion Mechanics Bank is both an investor and launch partner of Inclined.

“The deeper we went in, the more we liked it from a banking perspective,” said Carl Webb, president of Mechanics. Aside from the low risk of losses, “It serves an underserved consumer loan market. It’s a very unique space.”

Inclined’s software is placed between all-life carriers, currently Northwestern Mutual and MassMutual, and financial institutions. Lifetime advisors will invite their clients to Inclined’s portal, where clients can apply for a loan covered by their life insurance policy. Incline performs compliance and regulatory checks and ensures that there is collateral to support the line of credit, while financial institutions with which Inclined partners are on the other side place the loans on their balance sheets. The financial institutions will approve and monitor the credit policy.

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“These aren’t loans that were taken out and sold to a bank because they’re not term loans,” Wyss says. “They are dynamic lines of credit that last for years as long as the customer wants it.” Inclined’s software has no ability to charge fees, including origination fees, late fees, or collections. The fintech will monetize by charging platform fees to its financial institution partners.

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

As a launch partner, Mechanics helped Inclined design the compliance and risk management framework for banking partnerships.

“They brought the technology piece, we brought the balance sheet and blueprint for a bank-grade asset,” Webb said. “We’re in it because we like the asset class, the risk profile and the ability to scale it up.”

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