Life Cycle Financial Planners, LLC

Tag: estate planning

  • Why Do High Net Worth People Own Permanent Life Insurance?

    Why Do High Net Worth People Own Permanent Life Insurance?

    High net worth people tend to appreciate value and typically want life insurance protection for life.

    Permanent life insurance (sometimes referred to as whole life insurance) offers much better value for life insurance buyers than any type of term life insurance. The net cost of permanent life insurance is undeniably better.

    Net cost is the total premiums paid minus the total cash value. For example, if $80,000 of total premium is paid into a permanent policy over 10 years and the cash value of the policy is $80,000, there is a net cost of $0. That is not an error. It is how permanent insurance is designed. Comparatively, if $40,000 of total premiums were paid into a term policy over the same period, the net cost would be $40,000. The cost of term insurance increases as we get closer to life expectancy while a whole life premiums are level or may have been paid up in the early years.

    The longer you own a permanent life insurance policy, the better the net cost will be. A lower net cost number is better. Conversely, the longer you own term insurance, the higher the net cost will be.

    There are two types of life insurance that all policies fall into – permanent insurance and term life insurance. Most jumbo life insurance policies are permanent policies.

    What are the differences between term insurance and permanent life insurance?

    Permanent life insurance provides lifetime coverage, meaning that it can be designed to provide lifetime coverage or coverage to a target age. The target age is selected by the policy owner, not the insurance company. Not everyone needs or wants coverage for life.

    Some permanent life insurance policies build up equity or cash in the policy and some do not. Because term insurance has lower premiums in the early years, people mistakenly believe that term insurance is “better” coverage. Not only does permanent insurance have much lower net cost over time, it has much greater flexibility and it is more easily customizable.

    Permanent life insurance is the best value for lifetime coverage.

    Term insurance is temporary insurance – it expires at the end of a guaranteed period. Permanent insurance will stay inforce as long as the policyowner wants to keep it. Permanent insurance puts the policyowner in control of when coverage ends, not the insurance company.

    What Nobody Tells You About Term Life Insurance.

    “Over the past 25 years, people were sold a complicated marketing gimmick called “buy term and invest the rest”. Individual policyholders were told they could invest better than insurance companies, encouraging them to invest the annual difference between a term premium and the higher premium for a permanent policy. The difference would go into a side investment fund to be invested with hope it would be used to pay for the much higher term premiums later in life.

    Buy term and invest the difference has proved to be a costly mistake for millions.

    Although this sounded reasonable to unsuspecting life insurance consumers, “buy term and invest the rest” proved to be nothing more than slick marketing. It has been primarily promoted through multi-level marketing groups and entry level insurance agents. The projections are often run using unrealistic interest rates to grow the side fund. Someone who bought a 20 year term policy in 2005 may have seen projections using 7% while the actual interest rate over that period was half that amount, or less. The proponents often use average S&P returns to justify using high growth assumptions within the side fund. That is not a fair assumption either because the side fund cannot afford losses, forcing the side fund to invest conservatively.

    Insurance companies invest and manage billions of dollars compared to individuals who usually invest much smaller amounts. Insurance companies employ the best and brightest in their investment departments and insurance companies are able to monitor assets on a 24/7 basis, while policyholders cannot. There are no taxes paid while the insurance company is managing the assets. Person after person will tell you they never invested the annual difference. They bought inexpensive term insurance but never built up a side fund. The few who did invest, did not invest with discipline. If they skipped years or withdrew funds from the side fund account, the whole thing was derailed. The result is a messy trail of people with expiring term policies or compromised health. In worse case situations, some have no side fund and they cannot get new coverage because of health issues.

    Most people do not convert their term policy for good reasons.

    More and more people buy permanent life insurance when it is properly presented to them. “But what about Dave Ramsey and Suze Orman who don’t like permanent life insurance?” They are not insurance professionals and they do not offer advice to individuals because that would require them to be in compliance, carry the proper licences and put their reputations on the line. It is easy for pundits to make unsubstantiated claims. They sell ad space, books or subscriptions.

    Buying life insurance is often a process over a lifetime, not a one-time event. Term insurance can be the right decision for young families. The right time to consider buying permanent insurance is sooner than later. The following triggers lead people to consider permanent insurance:

    When moving from the “paycheck to paycheck” lifestyle, we become potential permanent life insurance buyers. Since ninety seven percent (97%) of all term policies do not pay a claim, then 97 percent of ALL term premium were wasted. High Net Worth (HNW) consumers and high income earners choose  permanent life insurance because it has better value:

    Replacing Your Income:  If your family  or business depends on you and your income to run smoothly, permanent life insurance is the right product for those who can handle the higher premiums.  

    Immediate Liquidity:  Very wealthy people own permanent life insurance. They want the guaranteed liquidity it provides at death. 

    Permanent Life Insurance Is The Best Tool For Mitigating Succession Planning Problems:

    • The value of assets fluctuates significantly and death is always the worst time to sell a business or other assets. 
    • Many people have children working in a family business. Life insurance is the great equalizer for those children who do not work in the business. Without liquidity in these cases, there is great risk to a smooth succession of a family business.
    • More and more grandparents own a life insurance policy for each of their grandchildren. The insurance policy is straightforward, inexpensive and a “feel good” asset knowing how it will impact the grandchildren. 
    • Premium Financing. Wealthy people have the ability to finance life insurance. When it makes sense, it is a very effective tool to create tax free wealth.

    Please contact us at 561-771-4647 or email me at TB@LifeCyclePlanners.com about a free review.

    Visit us at www.facebook.com/lifecycleplanners

    https://en.wikipedia.org/wiki/Whole_life_insurance l https://en.wikipedia.org/wiki/Life_insurance#Permanent_life_insurance

    best life insurance. what is term insurance?

  • Is The Estate Tax Going Up?

    Is The Estate Tax Going Up?

    https://ted-bernstein-insurance.blogspot.com/2019/01/estate-tax-and-life-insurance.html

    Visit my blog for insight and commentary about changes that may affect your planning decisions. The day after this post, Senator Sanders released his proposed bill to increase the federal estate tax.

    The Sanders proposal calls for your estate to pay a 70% tax on assets exceeding $3M per person. For a married couple, assets over $6M – $7M will be taxed. Our recommendation is to plan as if the tax is 50% over $6M of assets.

    Although you may have recently been told that the 40% estate tax would not increase and the tax free credit would never drop from $11,000,000, per person, lawmakers are at it again. To plan properly, it is helpful to use levels that reasonably represent both taxes over the past 50 years. This will provide sufficient liquidity at death to help pay the tax. Otherwise, your estate will shrink by as much as the net tax amount.

    For example, if we assume a $12,000,000 estate and a 50% estate tax for assets over $6,000,000 per couple, the tax calculation would be $6M X 50% = $3,000,000. To pass the full $12,000,000 to your heirs without any dilution, it might be wise to own $3,000,000 of permanent life insurance. The cost is minimal compared to the tax savings.

    If it turns out there is no tax at the time of death, the life insurance always proves to be welcome liquidity for your heirs. This liquidity is an immediate infusion of tax free money with benefits on many levels. The leverage of permanent life insurance for this purpose is undeniable.

    Please contact Ted Bernstein if you are concerned about the estate tax increasing. Let’s discuss your options and the planning strategies to mitigate the hit to your estate.

  • Why Do Some People Own Permanent Life Insurance?

    Why Do Some People Own Permanent Life Insurance?

    Permanent life insurance offers the best value possible. In the world of life insurance, the lowest net cost means the best value. People who can afford higher premiums in the early years demand the best value and they will be infinitely better off, in terms of the net cost, with a permanent form of life insurance.

    Term life insurance has low entry premiums but it is only temporary insurance and it is priced accordingly.

    Because it has low entry premiums, term insurance is easy to sell. The Term-ites (term only salespeople) attempt to commoditize this product so it can be easily sold online without a professional’s help. They can be somewhat cultish about why they believe term is better, all the time, for everyone. Some life insurance companies have carved out a niche as term only carriers because term insurance certainly has its place in the market. It is often the right choice for buy-sell agreement funding, short term loans and young families with limited financial resources.

    Permanent life insurance is often referred to as whole life insurance and it offers much better value for life insurance buyers who want lifetime coverage and can afford higher premiums in the early years. Comparing the net cost of permanent life insurance to to the net cost of term insurance is the right way to measure its superior value. Using the simple definition of net cost to be the total premiums paid minus total cash value, the goal of switching from term insurance to permanent insurance is an important step to take in optimal life insurance planning.

    What is the difference between term insurance and permanent life insurance?

    Permanent life insurance is better value for anyone considering coverage for life. Term insurance is the ideal name for temporary insurance. Term premiums increase when we are forced to renew. When the temporary insurance expires, people often find themselves without coverage when it is needed most.

    People buy permanent life insurance once its superior value is understood.

    “But Dave Ramsey and Suze Orman don’t like permanent life insurance”. Neither of them are insurance professionals and neither one counsels individuals. Their target audiences are young families unable to buy anything but term coverage and we applaud these families for doing so. Dave Ramsey and Suze Orman’s job is to sell ads and one way to do that is by making indefensible claims about popular products.

    When people move out of the “paycheck to paycheck” lifestyle, they become potential permanent life insurance buyers. Since more than ninety seven percent of ALL term policies do not pay a claim, then 97 percent of ALL term premium are wasted.  High Net Worth (HNW) consumers and high income earners need permanent life insurance for many different reasons:

    Income Replacement:  If your family  or business depends on your income, regardless of your age, life insurance guarantees no family disruption due to loss of income. 

    Immediate Liquidity – Wealth Transference:  High net worth and ultra-high net worth people own life insurance because they want GUARANTEED LIQUIDITY at death and they purchase permanent insurance because it’s guaranteed for life. 

    Some others are:

    • Asset values can fluctuate significantly. 
    • Children working in a family business. Life insurance is the great equalizer for those children who do not work in the business. Without liquidity in these cases, there is great risk to a smooth succession of the business.
    • Many clients own a life insurance policy for each of their grandchildren. The insurance policy is straightforward and inexpensive.
    • Premium Financing. HNW people have the ability to finance life insurance. When it makes sense, it is a very effective tool to create tax free wealth.

    High Net Worth people own life insurance to reinforce their succession plans. In these cases, assets may be real estate, businesses and other non-liquid assets. Life insurance provides immediate, tax free liquidity. It gives the family and their advisors time to properly execute the succession plan. Too many times, without sufficient liquidity, anxiety creeps in and family members get nervous. This can lead to litigation, confusion and disruption.

    Please contact us at 561-771-4647 or email me at TB@LifeCyclePlanners.com about a free review.

    Visit us at www.facebook.com/lifecycleplanners

    https://en.wikipedia.org/wiki/Whole_life_insurance l https://en.wikipedia.org/wiki/Life_insurance#Permanent_life_insurance

    best life insurance. what is term insurance?
  • Simple Tips For Successful Inheritances & Wealth Transfer

    Simple Tips For Successful Inheritances & Wealth Transfer

    Learn these simple tips for Successful Inheritances. Help your heirs hold on to their inheritances and keep your family intact.

    Giving while living is ideal but that oftentimes is not possible. Wealth transference can be complex and gut wrenching for some. Without careful planning, conditions can end up ripe for wealth destruction. Wealth will transfer, just maybe not where you intended it to go. If you’re not okay with your life’s assets enriching litigation departments of probate law firms you’ve never met, now may be a good time to enhance your current wealth transference plan. Don’t let the assets for your heirs end up being lost to professional fees.

    I see more and more cases where well-meaning inheritances are busting up families and family relationships. The attached article does a great job highlighting a few of the unintended consequences that can affect not only the rich and famous. How much would it disappoint you to learn that your children may never speak to each other again because of their inheritance. It is a reality that is occurring more often every day.

    INHERITANCE Feature-INNM0518

    Or you can click on the link at Insurance News Net to view the article online.

    Please contact me at 561-869-4500 or email me about a complementary consultation about the wealth transfer and inheritance issues that may be concerning you and your spouse.

    You can visit us at www.facebook.com/lifecycleplanners

    ted bernstein boca raton, ted bernstein insurance
  • Jumbo Life Insurance Policies: Which one is best?

    Jumbo Life Insurance Policies: Which one is best?

    Jumbo life insurance policies typically begin with face amounts of $10,000,000 and are often purchased by high net worth and ultra-high net worth people. Some insurance companies and some life insurance professionals cater to this market which is highly specialized. 

    Jumbo life insurance buyers will work with insurance professionals to secure coverage with the lowest rates and the best underwriting class. There are considerable differences when underwriting policies for $1,000,000 and ones for $15,000,000, $50,000,000 or $100,000,000.

    A key factor in determining the policy’s premium is the underwriting class that is offered. The difference in underwriting classes can be dramatic. Double digit differentials are typical because the cost of insurance is higher as the classes reflect.

    Don’t be fooled by “loss leader” rates that initially look good during the quoting process. The quoting process is not where the battle is won and lost.

    The best preferred rates are offered to people who take no medication, have no medical history and whose families have no medical histories. Underwriting term insurance is very different than underwriting permanent insurance such as whole life, indexed universal life and guaranteed universal life. Most high net worth consumers prefer permanent life insurance because they understand that the net cost of permanent life insurance is much lower than term insurance.

    In fact, getting you the best underwriting class should be the agent’s top priority once underwriting begins. Doing this properly requires experience and expertise from a professional who is willing to push back based on knowledge about illnesses and medications. The right agent will have extensive relationships with underwriters and who can represent all companies. Working with insurance agents who represent only one insurance company, known as a captive agent, is working against the best interest of life insurance buyers.

    There are only a small group of insurance companies specializing in the large case life insurance market. Insurance companies may share underwriting results with one another, which is authorized through the application process. One way is through the MIB (the medical information bureau). The chance of future problems increases if the underwriting process is not being managed properly. The best outcomes occur when insurance professionals represent the best interests of their client by approaching the process with complete transparency and disclosure.

    What you need to know for obtaining the best rates:

    Check your known underwriting history before submitting new applications. I work with my clients to get an accurate picture of their health history and their life insurance history, including previous submissions. With this information, we create a report of how much coverage is currently inforce and how much will be replaced, if any. The total amount of inforce coverage at the end of underwriting is critical information to share with underwriters, at the beginning of the process.

    Chronicle the medical history. This helps us understand both current and past health issues which may impact underwriting decisions. We recently helped a 66 year old woman acquire a jumbo policy for succession planning purposes. She had been on lithium for 15+ years without any problems. Suddenly, she had developed a tolerance to the lithium that created some temporary issues. All her current coverage was issued on a preferred basis. Knowing the history helped the right underwriters understand it was a medication problem and nothing else. Many underwriters declined the case.

    Product Design. The underwriting criteria is different for permanent coverage than it is for term insurance and selecting the right product can be complicated. Commissions, high cash value riders and term blends should all be considered as each of these variables can impact price and net costs. 

    Premium financing and jumbo life insurance: In many cases, it is a perfect combination. Premium financing is often an ideal strategy for purchasing permanent life insurance. Like now, loan rates are significantly lower than a policy’s rate of return and a policyholder’s ROI. An in depth analysis must be done by the life insurance professional to outline the pros and cons of Premium Financing:

    Cover letters go a long way in helping underwriters understand what a prospective client is trying to accomplish with life insurance. Often, these jumbo life policies involve complex estate planning strategies. A cover letter is always beneficial. 

    Please contact me at 561-771-4647 or email me. I offer a complimentary consultation to discuss anything you wish about life insurance or annuities. I am proud of the things many clients have chosen to say about us and perhaps they will give you additional insight about how we do business.

    You can visit us at www.facebook.com/lifecycleplanners

    https://en.wikipedia.org/wiki/Whole_life_insurance  https://en.wikipedia.org/wiki/Life_insurance#Permanent_life_insurance

  • “Not My Family!” Strategies To Avoid Wealth Destruction

    “Not My Family!” Strategies To Avoid Wealth Destruction

    Wealth destruction at inheritance time is showing no signs of slowing down. More and more family members are litigating with one another including attorneys, CPAs, wealth managers, family businesses and other related parties. Why is behind this unfortunate trend?

    Too often, all the planning attention is placed on the family’s financial and real estate assets. There is nothing wrong with this but when there were dysfunctional family dynamics before inheritance, it is likely there will be dysfunctional family dynamics upon death. Neglected during the planning process, this dysfunction can lead to unintended consequences for family and business relationships. Most people passing on wealth do so with an expectation that their generosity will be received in the spirit it was intended. Without a proper amount of focus on family dynamics, succession inheritance can cause further damage to family relationships.

    Avoiding Wealth Destruction

    “If your wealth transfer plan is not done carefully, your wealth will be transferred… just not where you intended. It will end up being transferred, that’s for sure. It will be paid out as legal fees to law firms and other professional firms. In no time, millions of dollars can be wiped out in fees and settlements.

    AVOID WEALTH DESTRUCTION – CLICK HERE

    Contact me at 561-869-4500 or email me at TB@LifeCyclePlanners.com for a complementary consultation. Or, visit us at Facebook

    ted bernstein boca raton florida 
  • Don’t Need or Don’t Want An Existing Life Insurance Policy?

    Don’t Need or Don’t Want An Existing Life Insurance Policy?

    Do You Know The Market Value Of Your Existing, Inforce Life Insurance Policy?

    Every day, people are receiving significant cash payments for unwanted or unneeded life insurance policies they thought had no value.

    If you are 65 or older, you may have a policy with asset value in the secondary market. The value of policies is measured as a percentage of the face amount. If you have a $2,000,000 policy with a settlement value of 10%, it is worth $200,000. It is fairly simple and straightforward to get an appraisal done to determine your policy’s value.

    Please email or call me at 561-869-4500. Visit us at Life Cycle Planners in Boca Raton, Florida.

    The secondary market is the market for unwanted life insurance policies – they are usually institutional investors. A good analogy is Carmax. They buy cars from people who don’t want or need them anymore. They specialize in the aftermarket of automobiles. In the life insurance industry, there are buyers who specialize in this market and they are typically the highest bidders.

    The state of Florida has made it mandatory for life insurance companies to inform Floridians that they should consult with a professional when contemplating a change:

    …“a life insurer shall provide an individual life insurance policyholder with a statement informing him or her that if he or she is considering making changes in the status of his or her policy, he or she should consult with a licensed insurance or financial advisor.”

    If you have a policy with cash value, its value is based on it and nothing more. Life settlements may not appeal to everyone. Some people don’t like the idea of strangers having an interest in their mortality. It is a perfectly reasonable position, regardless of the potential financial benefit that might exist. There can be meaningful differences in the offers you receive from the secondary market.

    Term life insurance policies may have value in the secondary market.

    There may be no cash surrender value in your life insurance policy but there may be great “market value” for a life settlement company. The payment you receive in a life settlement transaction is the market value (see the recent case studies below).

    It may be in your best interest to consider selling. The goal is to compare offers you receive against the value in the policy.

    More than 90% of seniors lapse policies without knowing about this option. They would have considered a life settlement if they were aware of the process.

    Further, 79 percent feel their advisers should have told them first.

    Depending on several factors, including age, health and policy type, life insurance policies can be valued as much as 20-30% of the face value. If you no longer want to pay premiums for a policy, there are realistic options to consider.

    The reasons to  consider selling an unwanted or unneeded policy:

    · Receive a higher cash payout than cash surrender value.
    · Receive money for a term policy.
    · Create cash to fund retirement solutions such as guaranteed income annuities, long term care insurance or life insurance with the installment payout option.

    For example, 30 years ago, Dr. Smith purchased $2,000,000 of life insurance to protect his wife and children against the loss of his $300,000 income. He was 46 when it was issued and today, at 75, his children are grown and the need for income protection is gone. With nearly $200,000 of guaranteed lifetime income from annuities, a pension and social security, Dr. Smith feels the policy is unnecessary.

    The insurance policy had a cash value value of $90,000 if he walked away. The Life Settlement value was 15% of the face value, or $300,000. The decision was simple in this case.

    Unfortunately, each year there are too many people who are still unaware of life settlements or they fail to give it proper consideration.

    Potential Disadvantages:

    1. Life Insurance benefits are usually income tax-free. Some portion of a life settlement may be subject to income tax.
    2. Paperwork is required to transfer the ownership of the policy.
    3. Proceeds will benefit the buyers, typically non-family members.

    Organizations such as the AICPA and hundreds of esteemed estate planning law firms are on record advocating the benefits of life settlements. Life insurance is an asset with great potential value.

    RECENT CASE STUDIES REPORTED IN THE INDUSTRY

    – an 88 year old male sold a $2,500,000 John Hancock policy, which netted him $500,000 (cash surrender value was $0),

    – an 88 year old male sold a $2,000,000 universal life policy for $1,110,000 (cash surrender value was $218,000),

    – a 64 year old female sold a term policy for $20,100 (the face value was $250,000; she kept $50,000 for her beneficiary),

    – a 72 year old man sold a $896,450 Transamerica policy for $196,476 (cash surrender value was $94,647),

    – a 61 year old man sold a $400,000 Mass Mutual term policy for $220,400.

    Please email me at Ted Bernstein or call me at 561-869-4500. Visit us at Life Cycle Planners in Boca Raton, Florida.

  • Life Insurance Premium Financing – Minimizing The Risks.

    Life Insurance Premium Financing – Minimizing The Risks.

    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 trust without 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:

    1. 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: 

    1. 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.
    2. 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.  
    3. Assuming you feel this strong correlation will continue in the future, financing may be right for you.
    4. 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.
    5. When interest rates rise quickly, there may be temporary rate compression or even rate inversion. Either scenario could increase the annual interest expense until rates stabilize.
    6. 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.
    7. 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.