Equitable Bank aims to bring insurance-backed loans to the masses
Since December 2018, Equitable Bank has been promoting a line of credit guaranteed by the surrender value of a whole life insurance policy to the Canada-wide advisor network. The concept is not new: Most large banks and firms dedicated to advisors, such as B2B Bank and Manulife Bank, already offer such loans.
Equitable Bank says it stands out from its rivals by offering more flexible underwriting criteria to advisors’ clients, to target John and Jane Q. Public. The bank approves a line of credit with a minimum of $15,000 and no maximum. Insured need not show proof of income to obtain the line of credit, or make any repayments. The bank repays the loan upon the insured’s death.
“We are very flexible: $15,000 is a very low approved minimum amount. It really opens it up to a very large swath of the Canadian population. Some other players focus more on very high net worth population,” says Michael Pilz, Senior business development manager, CSV Line of Credit, at Equitable Bank.
As for underwriting based solely on policy value, Pilz explains that most competitors also issue loans based on policy value but often ask borrowers to demonstrate their income and ability to repay the debt.
Financing retirement at a better rate
Conditions are fairly stringent. For example, clients must be aged 50 or over to be eligible, Pilz points out. The bank is positioning this line mainly as a means of financing retirement. The bank has set the credit limit at 90% of the surrender value of the insurance policy.
He adds that a line of credit guaranteed by a policy has advantages over loans on policies obtained from an insurer. The line takes the policy value as a guarantee, which means the value can continue to accumulate in the policy year after year while borrowers use the line to meet their needs. Four financing options are available: a one-time amount, an ad-hoc advance, an advance schedule on a monthly basis, or a combination of these options.
The rates offered compare favourably with those generally applicable to a loan on a policy, Pilz continues. He says the difference varies from 50 to 100 basis points, equal to between 0.50% to 1%. Equitable Bank offers the line at its prime rate plus 1.25%. Its current rate is 3.95%.
Insured must provide a complete insurance application, an up-to-date projection (often called an illustration) and a summary of the policy.
Another advantage of the insurance-backed loan: no impact on insureds’ income taxes. In contrast, loans on policies may incur taxes. Withdrawals that are not repaid within one taxation year are considered income. This income is taxable if it exceeds the adjusted base price of the insurance policy, that is the cumulative cost of pure insurance premiums.
Development underway…without universal life
Equitable Bank currently has agreements with Manulife and Canada Life (including the Great-West and London Life networks), and with BMO Insurance since July. Michael Pilz says he is actively discussing with other insurers. “There’s more announcements to come in the next months.”
For now, the offer covers all products with value, except for universal life. The bank wants to accumulate more experience before dealing with a product whose value is more volatile. Given the popularity of universal life, Equitable Bank sees an expansion as inevitable.