Worried that your term life insurance is expiring soon; without good options? Or it can’t be extended without paying 5x more premium?
By taking control now, we will help you find the best solution the market offers.
If your existing policy is going to expire soon because the conversion deadline passed and the term period will expire, there are good options even if your health has changed. Many people bought term insurance in their 30’s or 40’s who may have been advised that 20 years of coverage was sufficient. Today, if coverage is still needed, there are policies that have been designed for you. By following a few simple tips, you will NEVER have a gap in coverage again.
Creating a customized plan is what people want today from their life insurance policy. Our goals and objectives change over time. Understanding this, we make sure the policies and plans we offer adapt to the changes in your family and business. The best life insurance policy offers maximum flexibility.
“What is the best type of life insurance policy” is the most common question I am asked about life insurance and “How much should I own” runs a close second. Simply, there is no such thing as a “best” life insurance policy. Each one does very different things. The right insurance professional offers every type of policy because buying life insurance is not a one size fits all strategy.
For example, if you want premium flexibility, you rule out whole life. If you need coverage for life, you rule out term insurance. The best life insurance policy is inforce when you need it and is competitively priced, today and tomorrow. The premiums can be structured to increase over time as income grows. Some people prefer to pay more today and eliminate or reduce premiums in the future. Customization and flexibility are the keys.
Pro Tip: Review the policy at least every two years, it’s painless. Every owner of life insurance is best served by reviewing it on a regular basis.
You want a life insurance policy where you will never have to provide additional medical evidence in order to keep it. This is the biggest problem with term insurance; it’s not affordable after the term period without more health evidence. If you own a term life insurance policy or you are considering a new term insurance policy, let us explain the options available that will put you in control, not the policy. Simple new innovations such as the Installment Payout Option can reduce the premiums annually and give you guaranteed protection for life.
Term insurance or permanent insurance? Which should you buy?
For many life insurance buyers, term insurance fails when it is needed most and permanent insurance is too expensive initially. Innovation has made customization possible. To get the best insurance policy for you, make sure to consider:
Flexibility to change design as needs change over time.
All life insurance is NOT created equal. There is nothing to gain by working without a professional. Whatever compensation is paid to the agent is a built-in cost. It is ALWAYS paid whether the policy is purchased online or from a professional.
Please contact me at 561-869-4500 or email me about a complimentary consultation.
Why do high net worth people borrow to purchase life insurance?
Premium financing relies on the concept of interest rate arbitrage. A loan enables life insurance owners to keep their money working for them and earning a higher rate of return than the interest rate charged for the loan. Instead of paying life insurance premiums with their own capital, a low cost loan is advantageous. This rate arbitrage must be favorable and appreciated for a successful premium financing arrangement to be suitable and make sense for the borrower.
The Advantages of Premium Financing are:
Low cost method to fund permanent life insurance while offering great flexibility in the future.
Using well managed leverage to drive down out of pocket costs.
Using life insurance to offset estate taxes.
Using low cost loans to fund permanent life insurance with the goal being of having fully funded policies in the later years.
To minimize out of pocket costs in early years until the anticipated exit strategies can pay off the loan.
Successful premium financing is understanding the risks and managing expectations. Working together with insurance companies and lenders ensures successful outcomes. People borrow money to pay for life insurance because they can borrow the annual premiums at a lower rate than what they are earning on their money. This historically reliable arbitrage between loan interest rates and a borrower’s ROI must be present for this to make sense. Later, we will explore this important arbitrage in more detail.
Premium Financing gives families with illiquid estates the ability to acquire large amounts of needed liquidity at death. By only paying annual interest on the loan, the out of pocket cost is less than paying properly funded permanent policies. Many estate planning attorneys find this financing strategy helpful to accomplish their wealth transfer objectives.
With short term interest rates near zero percent, life insurance premium financing gets strong consideration among high net worth life insurance buyers. Proceeds from life insurance provides the much needed liquidity that complements succession planning and wealth transfer planning strategies. Financing jumbo life insurance policies is often appealing to HNW people and their advisors because the arbitrage DOES EXIST between actual borrowing cost and the client’s overall ROI. If we look back 50 years, we see that interest rates are lower than insurance company crediting rates, with almost no exceptions. This correlation is the foundation of successful premium financing.
I have arranged financing for more than 500 families over the course of my career. As a result, I bring valuable expertise and experience that benefits consumers, their advisors, lenders and life insurance companies. For example,it is true that low interest rates are beneficial, if nothing more than causing a lower out of pocket cost. But, financing a life insurance policy should make sense whether interest rates are 3%, 6% or 9%. When borrowing costs increase, the values inside the life insurance policy should also be increasing. That can also lead to less collateral being needed for the loan and less premiums to fund the policy.
The borrowing rate is only one part of the premium finance story. Historically, insurance companies pay higher interest on policy cash values than borrowers pay for interest on loans. This is the other important rate arbitrage that should exist in properly structured premium finance arrangements.
Premium Financing Done Right.
Not free life insurance.
If premium financing is not “free life insurance”, then what is the true cost of financing a life insurance policy? It is the annual interest expense; that is the true out of pocket “cost” of a premium finance loan. When the loan is paid off, either during lifetime or upon death, that too is part of the cost.
With rates near 0%, premium financing is a strategy that deserves strong consideration for high net worth individuals, families and business owners who need permanent life insurance coverage. Compared to paying the annual premiums out of pocket, there are advantages to using a competitively priced loan to pay the premiums.
A properly structured premium finance arrangement is best suited for people who need and want coverage for life. The cost to borrow the annual premiums should be at least 3% lower than the ROI on their other assets. This creates another arbitrage that justifies premium financing. For example, if the loan interest rate is 4%, then the borrower’s ROI on other assets should be 7% or greater. If it is not, then it may not make sense to finance life insurance.
Premium Financing Considerations:
Each premium finance loan is unique and should be stress tested using conservative assumptions. We recommend working with experienced insurance professionals, advisors and experienced lenders who are familiar with this asset class.
The majority of the collateral for premium finance loans is typically the cash value within the policy. The reason lenders are willing to make premium finance loans at low interest rates is because cash value is considered to be as creditworthy as cash. Currently, premium finance loans are less than 3%. While interest rates are at historic lows, it can be wise to consider locking in a fixed rate.
Exit Strategy and The Loan Payoff.
There must be a sensible exit strategy to pay off the loan. One option is to use cash value from the policy. Another is to use assets already in the trust, such as inheritance monies, liquidity events from sales, etc. When the cash value of the policy is used to pay off the debt, make sure the policy is properly funded to remain inforce for life, after the cash value has been withdrawn or borrowed from the policy.
Can Real estate be used as collateral for premium finance loans?
Lenders typically do not like lending against real estate for these loans because the collateral is not easily available. However, there are some lenders that do work with existing clients to use real estate to support these loans. This tends to complicate something that is already complex. Customers with strong relationships have been known to receive loans from their existing bank.
Premium Financing and Estate Planning.
A premium financing arrangement can be beneficial to your overall estate plan. The life insurance policy is typically owned in a trustwithout gift tax or estate tax consequence. It is not uncommon for $25,000,000+ life insurance policies to be financed and owned in trusts that may be exempt from gift or estate taxation.
Premium Financing Is Best Suited For:
Clients who need jumbo amounts of permanent death benefit. 2. Clients who understand leverage & complex financial transactions, or 3. Clients using life insurance to offset estate taxes.
Business owners interested in succession planning and key-person protection may also be good candidates for premium finance arrangements:
Top 7 Premium Finance Considerations:
Lenders and insurance companies require that these loans are collateralized. The policy’s cash value is typically the majority of the collateral. In the early years, there is typically a small gap which the policy owner is required to satisfy.
The borrowing cost and the policy crediting rates have long been favorably correlated for these types of structures. They historically move in the same direction with the insurance policy crediting rates and dividend scales being higher than the borrowing costs.
Assuming you feel this strong correlation will continue in the future, financing may be right for you.
A positive rate arbitrage is created when policy crediting rates are greater than loan costs and a cushion is created that can be used when interest rates turn volatile or increase rapidly.
When interest rates rise quickly, there may be temporary rate compression or even rate inversion. Either scenariocould increase the annual interest expense until rates stabilize.
The cash value of the life insurance policy ultimately represents 100% of the required collateral for the loan. Gap collateral must be pledged until the cash value is 100% of loan value, typically in less than 10 years.
Properly structured, no personal guarantees are necessary.
Premium Finance Risks:
– Decreasing policy interest rates and policy performance risk. – Increasing borrowing costs or inability to refinance. – Policy lapse risk. – Collateral call risk. – Income tax risk.
STOLI RISK:Many premium finance structures have been created or used to take advantage of consumers and insurance companies by purchasing policies owned by strangers. They do this for the sole purpose of re-selling or using them for an illegal profit. We will not participate in STOLI arrangements and we urge people to avoid using life insurance for anything other than long term death benefit. Stranger Owned Life Insurance (STOLI) is not legitimate premium financing and should be avoided. Before proceeding with any premium financing arrangement, you want to fully understand the risks mentioned here and the exit strategies.
Inforce Life Insurance Policy Premium Financing:
Policy is the only collateral for the full loan balance; no PG.
Our capital source is a New York lender experienced in this asset class.
7-year loan maximum.
Fees and interest are financed as part of the loan. Little or no out of pocket expense.
Competitive interest rate.
Life expectancies: 12 years or Less. Sweet spot is 9 years or less.
Insureds: 70 and over.
Individual Policies: $3-99m face.
Portfolios: $35-500m face.
Issued Preferred or Standard.
Term sheets: Please allow turnaround time of 3-4 working days.
International loans not an issue.
In addition to securing coverage and arranging for the right lenders for each loan, Ted is often hired as an impartial consultant to help life insurance buyers determine which is the best financing solution. These cases often involve jumbo insurance amounts. Working with an experienced consultant on your side that is not selling product can prove to be very valuable.
You can Email Ted or contact him directly at 561-869-4500.
Can you recall any life insurance company campaigns targeting consumers directly about the value and virtues of their core products? Have you ever seen these ads during the LPGA, The Masters, The World Cup or the World Series?
They could be promoting the value of income annuities in retirement, or the differences between permanent life insurance and term insurance? Each of those events reaches the necessary demographics for our industry. Imagine if Apple did not advertise directly to their customers? What if Ford didn’t advertise directly to buyers but GM and Toyota did, spending hundreds of millions of dollars targeted right at those consumers? The immediate impact on GM sales would be dramatic.
Imagine if these companies left the sole messaging responsibility to their local, privately owned distributors? They wouldn’t. It would be disastrous in every way. And yet, this is exactly what is happening with the life and annuity companies; almost without exception.
This is not about brand advertising. There is plenty of money being spent on branding ad campaigns while Suze Orman, Ken Fisher and Dave Ramsey have taken control of these conversations affecting our businesses.
Why are these companies not advertising and marketing their products to their policyholders? One explanation from some companies is that they do not sell directly to consumers and as a result, it is not their responsibility. Insurance companies rely on a variety of distribution methods to sell and reach their policyholders, mostly through a network of professional agents who specialize in the sale of these products.
Distribution in the automobile industry is similar. For example, as consumers, we are unable to purchase a BMW directly from the BMW company. Nor can we buy a Cadillac directly from GM. We buy from their middleman, their dealerships. The car companies support their distributors in many ways and one way is through direct to consumer advertising and marketing. The manufacturers advertise on a national level and their dealerships are targeting more locally in a coordinated partnership.
We have reached the point where our product manufacturers must seize this responsibility and begin to advertise, promote and market the products they manufacture, directly to insurance and annuity buyers. Over the past several years, there has been an obsession to “crack the code”, to find a way to jump start and create online consumer demand for life insurance and annuities. Unfortunately for all stakeholders, no magic bullet has been found. Life insurance is sold, not bought. But the insurance companies can help us create demand for these products. We are the industry’s “dealerships” and we simply cannot afford to shoulder this responsibility without their help.
The time is now for the industry to use its formidable resources and take control of these conversations. The carriers should begin inspirational campaigns that are dedicated to influence consumers to take action. This messaging requires complex, multi-media campaigns. I believe the ROI will be significant on many tangible and intangible levels, especially on new sales.
Without this change, calculated misinformation from our competitors will continue to influence consumers about our products. Consumers will lack the education based information to make informed decisions which negatively impacts sales. As the whole pie continues shrinking, so too will the overall slice for each distributor. We know this happens. The industry continues to lose agents every year and the remaining agents have reached an average age of 60. Sales are down or flat every year!
Currently, it is our competitors who define our products, our services and our professional status. They spend more, they message better and they communicate better with financial journalists. With all due respect to the few journalists who cover and do know the insurance and annuity space well, there are far too many others making incorrect and un-rebutted claims about our industry. I worry every time I see an article about life insurance and annuities written by journalists without the credentials to critique these products. Asking the distribution system to be solely responsible for pushing back against these misinformation campaigns is ineffective. By definition, we are easily dismissed for lacking objectivity and impartiality.
As these trends persist, crises of uninsured’s and under-insured’s have emerged into a national problem. I also suggest that there is a crisis of incorrectly insured’s, people who own the wrong coverage. There are millions of term insurance policyholders in their 50’s and 60’s who are near the end of the guaranteed term period, without good options. They didn’t convert and the conversion deadline passed meaning they cannot convert if they wanted to. For some, obtaining new coverage is filled with hurdles. Their health has changed and their budgets may not allow them to acquire what they now need.
How did they get here? Suzy Orman, Dave Ramsey and Art Williams told them to buy term and invest the difference. But nobody did. They bought term but didn’t invest the difference with any kind of discipline, if they did at all. Too many inexperienced insurance agents told people they would not need life insurance once their kids were grown and independent. Ask any person over 50 with kids and a spouse if they have no further need for life insurance today. There is plenty of pain and blame to go around but these consumers deserve good solutions going forward and we need to counsel the millennial generation about how to buy the right blend of affordable protection, for now, and permanent coverage for later. The cheapest term insurance product when they’re 35 is not the answer.
It is time for the entire compensation system to be reconsidered. Part of the reason for the widening gap of un-insured’s and under-insured’s in the middle market is because the commission is too low for sales in this market. As premiums drop and commission levels remain constant, the selling compensation is dropping in real terms.
To conclude with some good news, I am hearing more and more carrier interest about direct to consumer campaigns. Let’s hope this interest turns into real, meaningful dialogue about these issues, with all stakeholders.
Life insurance without built-in commissions is best suited for permanent life insurance buyers who want low premiums and better performance, especially in the very early years. The commissioned compensation model was designed more than 100 years ago when the average face amount of a life insurance policy was less than $5000. Today, some people purchase life insurance policies with face amounts as high as one hundred million. If you are considering a permanent life insurance policy, chances are good that you will find value in life insurance policies that offer some flexibility over how much commission is paid.
Life insurance premium financing is a perfect example for using a low commission product to enhance the structure of the financing. I believe it is a primary financing goal to borrow as little as possible and pay the least amount of interest expense for the loan. Designing the life insurance policy properly can help accomplish both of these objectives.
As the innovator of life insurance without commissions or fee-based life insurance, I will always be concerned about the negative perceptions associated with life insurance. Offering complete disclosure and transparency about policy pricing, permanent insurance without built-in commissions can offer meaningful value to life insurance buyers.
“Bernstein…has introduced what are essentially no-load and low-load policies to the life insurance business…That could mean huge savings for policy buyers.” Forbes
“Low-load Life Performs Better For Clients, Companies” National Underwriter
Short Term Value Enhancement
Instead of creating policies with built-in commissions, the insurance company can design policies to offer better value in the early years, especially. Because the commission is a relatively small expense over the life of a policy, its long term impact is less dramatic. When the insurance company does not have to pay high early year commissions, the policy’s early year surrender values can be as much as 95% of the premium paid. Instead of receiving commissions from the insurance company, the life insurance buyers pays a fee.
“Life insurance without built-in commissions provides a meaningful alternative for buyers of large permanent life insurance policies, especially in the estate planning, premium finance and corporate owned life insurance markets.”Ted Bernstein“Back in 1982, Bernstein was sure he had an idea for a new service that would save consumers money. There was just one problem: it was bound to alienate all the people who would normally sell it…he started a campaign to explain his concept to other professionals to whom a wealthy person might go to for advice for life insurance: namely, lawyers, accountants and bankers in trust departments.” Martha Mangelsdorf,Inc.
Typical Uses of Life Insurance Without Commissions:
1. Buyers seeking large face amounts, in excess of $5,000,000.
2. Overfunding a permanent life insurance policy for retirement planning purposes.
3. Second to die policies, especially in excess of $5,000,000.
4. Premium financing.
5. Corporate Owned Life Insurance
premium financing, life insurance commissions
Give us a call at 561-869-4500 or email me at TB@LifeCyclePlanners to get started. I offer a complementary conversation about anything on your mind concerning your insurance coverage or succession plan.
