Fintech opens up a new market for banks: life insurance lending and other news

Published by
Peter Kavinsky

Many people buy life insurance as protection for their beneficiaries after their death. Josh Wyss also sees it as a store of value throughout his life.

Unlike term life insurance, which covers a specific period of the insured’s life, life insurers can borrow against the cash value of their policies when they need income. Money is not taxed while it is accumulated inside the policy and is not taxed when it is taken out as a loan.

“Especially people who themselves are not entitled to a lifetime, think that people take out policies for life, thinking only about the death benefit,” Wyss said. “It’s just not true.”

By taking out a 12-year life insurance loan, Wyss found many opportunities to improve the process.

For both the user and the provider, “It’s very painful,” he said. “The technology isn’t there and it takes a long time to install one of those lines.” So painful, in fact, that the bank he borrowed from told him in March 2020 that they would not renew his line of credit and were pulling out of the market entirely.

“They said that initiating, maintaining and managing provisioning is cumbersome and manual, mainly because you have to interact with all life hosts with ancient systems, and the number of people they had to throw into this business became cumbersome over time. Wyss said. “It was an ‘aha’ moment for me.”

Wyss co-founded a fintech called Inclined, which helps banks get involved in this form of lending. Although this asset poses a very low risk to the lender because the cash value of the policy serves as collateral, Wyss’s research found that only a few banks in the country guarantee lifelong lines of credit against policies. According to his estimates, 90% of the market for such loans falls on life insurers.

Inclined, which announced on Friday it has raised $15 million in Series A funding, is aiming to solve the problem for banks. It already has Mechanics Bank in Walnut Creek, Calif., and is expected to launch two to four more financial institutions in the coming quarters. Some are drawn to the break-even feature of the loan, while others hope the loans will spark new customer relationships, the company says. Wyss believes that banks are better prepared to make such loans than life insurance companies because they have a lower cost of funds than mutually arranged insurance companies.

“We are looking for banks that want to make this a scalable line of business,” said Amir Friedman, chief wealth officer at Inclined. “These are the banks that are interested in creating a new consumer lending division.”

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

“The deeper we dug, the more we liked it from a bank perspective,” said Carl Webb, chairman of Mechanics. In addition to its low risk of loss, “it serves an underserved consumer finance market. It’s a very unique space.”

The Inclined software will sit between carriers, currently Northwestern Mutual and MassMutual, and financial institutions. Lifetime consultants invite their clients to the Inclined Portal, where clients can apply for a loan secured by their policy for life. Inclined conducts compliance and regulatory checks and provides collateral to support the line of credit, while the financial institutions that Inclined does business with, on the other hand, lend out on their balance sheets. Financial institutions approve and oversee credit policies.

“These are not loans that are issued and sold to a bank because they are not term loans,” Wyss said. “These are dynamic lines of credit that last for years as long as the customer wants them.” The Inclined software does not allow you to charge any fees, including but not limited to postage fees, late fees or fees. Fintech will make money by charging fees for the platform from their financial institution partners.

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

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

“They brought the technology part, we brought the balance sheet and bank-grade asset plan,” Webb said. “We are in this because we like the asset class, the risk profile and the ability to scale it.”

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