For a long time, the combination of a bullet loan and life insurance was presented as an ideal investment strategy. On the one hand, a loan for which you only repay the interest during the term of the loan, and on the other, an investment that is supposed to generate enough return to repay the capital at maturity. On paper, the deal seemed perfect. In reality, many investors have found themselves trapped by stock market underperformance, leading to ongoing disputes since the 2008 financial crisis.
I. How it works and what it promises
A key feature of a bullet loan is that the borrower repays only the interest throughout the term of the loan, with the capital being repaid in full at maturity. As Dominique Legeais points out in JurisClasseur Commercial (Fasc. 346-1), this type of loan is often combined with a life insurance policy, usually unit-linked, pledged to the lending bank.
The mechanism seems ingenious: the borrowed funds are invested in the life insurance policy, the interest on the loan is paid monthly, and the expected value of the policy should enable the capital to be repaid at maturity. This arrangement is traditionally presented in a favourable light by bank advisers, who highlight several advantages:
- The leverage effect of low lending rates compared with expected returns
- Deductibility of loan interest in certain cases of rental investment
- The tax advantages of life insurance (tax allowances, lower taxation after 8 years)
"In the minds of policyholders, the value of contracts at maturity should enable them to repay the loan at maturity. But the crisis has rendered these forecasts often futile," notes Legeais.
II. Risks that are often overlooked
The main blind spot in this arrangement is the stock market risk. Unit-linked life insurance policies offer no capital guarantee and are subject to fluctuations in the financial markets. The crisis of 2008, and the periods of volatility that followed, showed that returns could be much lower than initial projections.
One aspect that is rarely explained is the accumulation of charges that eat into returns: life insurance entry fees (up to 5%), annual management fees, arbitration fees, not forgetting bank charges linked to loans and collateral. These costs can represent several performance points lost each year.
Case law has gradually recognised the indivisibility between the different contracts forming the package. As confirmed by the Cour de cassation in a ruling dated 1 October 2014, this indivisibility can have several important legal consequences, in particular "the waiver by one of the parties to rely on it entails the disappearance of the other" (RD bancaire et fin. 2014, comm. 202).
Another crucial element is the distinction between informed and uninformed customers. The Court of Cassation has ruled that "an informed client must have the capacity to understand the nature of the product, the risks and the appropriateness of the transaction" (Cass. com., 8 March 2011). For non-informed customers, case law has progressively strengthened the obligations of financial institutions.
III. Responsibilities and solutions
Financial institutions are subject to an arsenal of obligations, both under the Insurance Code for the distribution of life insurance and under the Monetary and Financial Code for the provision of investment services.
Article L. 132-27-1 of the Insurance Code requires the insurer to "specify the requirements and needs expressed by the policyholder" and to provide "the reasons for the advice given in respect of a particular contract". Similarly, article L. 533-12 of the Monetary and Financial Code requires information to be "accurate, clear and not misleading".
In the event of a dispute, the courts now examine whether the arrangement is complex or commonplace, whether the investor had experience of this type of product, and whether it was tailored to his requirements or needs. As the Court of Cassation ruled on 27 March 2014, the service provider must "draw attention to the characteristics of the proposed product, to the less favourable aspects that may result from price movements and to the fact that he could be exposed to a loss of capital" (Cass. 2e civ., no. 13-16.672).
There are several solutions available to investors faced with an unfavourable situation:
- Renegotiating with the lending institution (extending the term, lowering the rate)
- Liability for failure to provide information, warnings or advice
- Requalification of the contract in the event of non-compliance with formal obligations (mention of the TEG)
- In certain cases, an action for nullity on the grounds of fraud or error can be brought.
Before embarking on such an arrangement, it is advisable to exercise caution:
- Requiring simulations of negative market performance
- Compare the total cost of credit with the expected return after charges
- Check that the package matches your overall asset situation
- Obtain written confirmation of product characteristics and risks
This type of arrangement is not inherently harmful, but requires a thorough understanding of the mechanisms and risks involved. The bank's obligation to provide information must be supplemented by heightened vigilance on the part of the investor.
Sources
- Legeais, D. (2015). Bank liability and financial engineering. JurisClasseur Commercial, Fasc. 346-1.
- Court of Cassation, Commercial Division, 8 March 2011, no. 10-14.456
- Court of Cassation, 2nd Civil Chamber, 27 March 2014, no. 13-16.672
- Court of Cassation, 1st Civil Chamber, 1 October 2014, RD bancaire et fin. 2014, comm. 202
- Insurance Code, article L. 132-27-1
- Monetary and Financial Code, article L. 533-12
EN 
FR