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

Many people buy whole life insurance as protection for their beneficiaries after they die. Josh Wyss also sees it as a means of saving during his lifetime.

Unlike with life insurance, which covers a specific period of the policyholder’s life, whole life policyholders can borrow against the cash value of their policies when they need income. The money is not taxed while it is compounded in the policy, nor is it taxed when it is taken out as a loan.

“Especially people who don’t have whole life themselves think that people go into whole life policies just thinking about the death benefit,” Wyss said. “That’s simply not true.”

After borrowing against life insurance 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 it would not renew his credit line and pulled out of the market altogether.

“They said that the origination, service and security is cumbersome and manual, mainly because you have to communicate with the whole life carriers with ancient systems, and the amount of people they had to throw at this business over time to manage it became unmanageable,” said Wyss. “It was an ‘aha’ moment for me.”

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

Inclined, which announced on Friday that it had raised $15 million in its Series A funding, aims to solve this problem for banks. It already has Mechanics Bank, in Walnut Creek, Calif., on board, and two to four more financial institutions are expected to launch in the coming quarters. Some are attracted by the loss-free nature of the loan, while others hope these loans will create new customer relationships, according to the company. Wyss believes that banks are better equipped than life insurance companies to make these loans because they have lower funds than mutual insurance companies.

“We’re looking for banks that want to make this a scalable industry,” said Amir Friedman, head of capital at Inclined. “These are banks that have an interest in standing up for a new department of consumer loans.”

Mechanics Bank, which is valued at $18.6 billion, is both an investor in and launch partner of Inclined.

“The deeper we delved, the more we liked it from a banking perspective,” said Carl Webb, chairman of Mechanics. Beyond the low risk of loss, “it serves an underserved market in the consumer lending space. It’s a very unique space.”

Inclined’s software will sit between whole life carriers, currently Northwestern Mutual and MassMutual, and financial institutions. Whole life advisers will invite their customers to Inclined’s portal, where customers can apply for a loan secured by whole life insurance. Inclined runs compliance and regulatory controls and ensures that there is collateral to support the line of credit while financial institutions that Inclined works with on the other end originate the loans on the balance sheet. The financial institutions will approve the credit policy and supervise it.

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

Still, there are disadvantages for the consumer or their beneficiary. If the policyholder dies before the loan is paid off, the insurance company will reduce the death benefit by the amount they owe.

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

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