Many people take out life insurance to protect their beneficiaries after their death. Josh Wyss also sees it as a savings vehicle during his lifetime.
Unlike term life insurance, which covers a specific stage of a policyholder’s life, whole life insurance policyholders can borrow against the present value of their policies when they need income. The money is not taxed while it is accruing interest within the policy, nor is it taxed when borrowed.
“Especially people who don’t have a whole life themselves think that when it comes to life insurance, you only think of death benefits,” says Wyss. “That’s just not true.”
After 12 years of lending his life insurance, Wyss has found plenty of room for improvement in this 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 set up any of these lines.” So painful that in March 2020 the bank he borrowed from told him they would not be renewing his line of credit and would pull out of the market entirely.
“They said it’s cumbersome and manual to create, maintain and collateral manage, mainly because you have to communicate with entire livelihoods with legacy systems and the amount of people they’ve had to throw at this business over time to manage , became unwieldy,” Wyss said. “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, since the policy’s cash value serves as collateral, Wyss research has found that few banks in the country accept credit lines for life insurance policies. He estimates that 90% of the market for these loans is through the life insurance carrier.
Inclinted, 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 of Walnut Creek, Calif. on board, with two to four other financial institutions expected to form in the coming quarters. Some are attracted by the loan’s no-loss nature, while others hope these loans will build new customer relationships, according to the company. Wyss believes that banks are better equipped than life insurers to make these loans because they have lower funding costs than mutual insurers.
“We’re looking for banks that want to make this a scalable line of business,” said Amir Friedman, Inclined’s chief capital officer. “These are banks that have an interest in building a new consumer lending business.”
The $18.6 billion Mechanics Bank is both an investor and a founding partner of Inclined.
“The deeper we dived, the more we liked it from the banks’ perspective,” said Carl Webb, Mechanics chairman. Aside from the low risk of loss, it “serves an underserved consumer credit market. It’s a very unique area.”
Inclined’s software is used between life carriers, currently Northwestern Mutual and MassMutual, and financial institutions. Life insurance advisors invite their clients to Inclined’s portal where clients can apply for a loan secured by their life insurance policy. Inclint performs compliance and regulatory checks and ensures there is collateral to support the line of credit, while financial institutions that Inclint works with on the other end originate the loans on their balance sheets. Financial institutions will approve and oversee lending policies.
“These are not loans that are made 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 desires.” Inclined’s software cannot charge any fees, including handling fees, late fees, or collection fees. The fintech will make money by charging platform fees to its financial institution partners.
Nevertheless, there are disadvantages for the consumer or his beneficiaries. If the policyholder dies before the loan is repaid, the insurance company reduces the death benefit by the amount owed.
As a launch partner, Mechanics helped Inclined design its banking partnership compliance and risk management framework.
“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 scalability.”