Fintech opens up a new market for banks: Lending vs. Life Insurance
Many people buy whole life insurance as protection for their beneficiaries after their death. Josh Wes also sees it as a savings vehicle during his lifetime.
Unlike term life insurance, which covers a specific period of the policyholder’s life, life insurance policyholders can borrow against the cash value of their policies when they need the income. Money is not taxed while it is aggravated within the policy, nor is it taxed when it is taken as a loan.
“In particular, people who don’t have a full life themselves believe that people get into the politics of whole life and think only of the benefit of death,” Wyss said. “This is simply not true.”
After borrowing against his 12-year life insurance, Wyss found plenty of room for improvement in 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 fonts.” So painful, in fact, that the bank he borrowed from told him in March 2020 that it would not renew its line of credit and that it would withdraw from the market entirely.
“They said that creating, servicing, managing collateral is cumbersome and manual, mainly because you have to deal with whole life movers with legacy systems, and the number of people you have to throw into this business over time to manage it is becoming difficult,” Wyss said. That’s an ‘aha’ moment for me.
Wyss co-founded a fintech company called Inclined that helps banks participate in this type of lending. Although the asset is considered very low risk for the lender, because the monetary value of the policy acts as collateral, Wyss’ research found that only a few banks in the country guarantee lines of credit against lifetime policies. It is estimated that 90% of the market for these loans is conducted through the life insurance company.
Mills, which announced Friday that it has raised $15 million in its Series 1 financing, aims to solve that problem for banks. It already has a Mechanics Bank, in Walnut Creek, California, on board, and two to four other financial institutions are expected to launch in the coming quarters. Some are drawn to the loan’s non-loan characteristic, while others hope these loans will build new customer relationships, according to the company. Wyss believes that banks are better equipped than life-long carriers to provide these loans because they have a lower cost of funds than mutually regulated insurance companies.
“We are looking for banks that want to make this a scalable business,” said Amir Friedman, chief capital officer at Inclined. “These are banks with an interest in setting up a new consumer lending division.”
The $18.6 billion Mechanics Bank is an investor and partner in Inclinked.
“The more we dig into the research, the more we like it from a bank perspective,” said Carl Webb, president of Mechanics. In addition to the low risk of losses, “it serves a disadvantaged market in consumer lending. It’s a very unique space.”
The Inclined program will sit between fully operational carriers, currently Northwestern Mutual and MassMutual, and financial institutions. Whole Life Consultants will invite their clients to the Inclined Portal, where clients can apply for a loan secured by their Whole Life Policy. Enellind conducts regulatory compliance and oversight checks and ensures there are guarantees in place to back the line of credit while financial institutions with which partners tend to be on the other end create loans on their balance sheets. Financial institutions will approve and exercise control over credit policy.
“These are not loans created and sold to a bank because they are not term loans,” Wyss said. “It’s dynamic lines of credit that last for years as long as the customer wants it.” The Inclined Program does not have the ability to charge any fees, including creation fees, late fees, or collection fees. Fintech will make money by charging the platform fees to its financial institution partners.
There are still disadvantages to 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 they owe.
As a launch partner, Inclined helped design the Partnership Banking Compliance and Risk Management framework.
“They brought in the piece of technology, and we presented the balance sheet and blueprint for a bank-class asset,” Webb said. “We’re in it because we like the asset class, risk profile, and ability to scale.”