Premium Financing Quarterly’s
“ASK THE EXPERT” With Life & Annuity Masters Premium Finance Guru, Tim Whitmore
Tim Whitmore has decades of experience working with clients and advisors on premium financing strategies. In this interview with InsuranceNewsNet, Whitmore discusses ethical advising and the powerful leverage that financing provides. INN: Why is premium financing so big today? WHITMORE: For two reasons. The main one is our extended low-interest rate environment. There’s no anticipation that we’re going to have a significant increase in borrowing rates for the next 10 years. The second is the indexed universal life policy. Having a policy where you can put money in, have no market risk and then have the opportunity to earn with an index that’s tied to the equity market is a very attractive option these days. INN: Some people think premium financing for life insurance is new because it’s recently come into the spotlight, but it has a long track record of success, doesn’t it? WHITMORE: Absolutely. It’s been around for 20 years in life insurance. In 2004, when I would speak to a group of 300 advisors, I’d always ask how many had heard about premium financing. I might get five or 10 hands. Ask that same question today, every hand goes up. It’s been an education with the proliferation of index products, along with the lowinterest rate environment and a bunch of people jumping into this marketplace. That’s why many think it’s just come around the past couple of years.
or LIBOR. LIBOR can be a 30-day, quarterly or annual rate. The bank then adds a spread on top of that to get your final borrowing rate. The spread is guaranteed fixed for the term of the loan. Take LIBOR today at 190 basis points. If your spread was 200 over LIBOR, your borrowing rate would be 390%. That would be locked in for a year. [If] next year LIBOR goes up to 200 basis points from 190, your borrowing rate would then be 400%, or the 200 spread above the 200 borrowing. That being said, you can get fixed rates. You can collar rates. You can say that if it increases to a certain percentage, that’s the maximum I’m going to pay. Clients have to pay for these features. But in this interest rate environment, it doesn’t make sense for a client to fix a rate. Why pay for fixing a rate when it’s not anticipated to increase significantly in the next 10 years? INN: Who are ideal clients for premium financing?
INN: Is the interest rate on the financing adjusted every year, or is it locked in when the client buys it?
WHITMORE: Clients who understand arbitrage [using someone else’s money] and earn a rate on their assets greater than loan rates. These clients also need to have a minimum net worth of $5 million to be considered for traditional financing. Also, clients need to have an income of $300,000 or more, as they have to have the ability to afford the interest payments. We’re talking about doctors, attorneys, professional athletes, entertainers, business owners, executives, dentists. If the clients understand arbitrage, they understand the value of using other people’s money and how premium financing can be a much more cost-effective way to buy insurance.
WHITMORE: I do all my cases with a floating rate. It’s based on an index of either prime
INN: How does that arbitrage work? How does that loan get paid back?
10 February 2020
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