WHITMORE: The way we used to pay back the loan, when it was done almost exclusively for estate planning, was with an exit-at-death strategy. That means when the insured died, the bank would be paid back out of the death benefit proceeds. But it’s a different landscape today. There are only a couple of carriers that allow that particular design strategy. [With] all others, you have to pay with either cash value of the policy or with outside sources. You need to design the policy so that at some point, you have enough cash value inside the policy to take out the loan. But even when you [use] those design strategies, you also want to have an alternative strategy so that if the policy does not perform as illustrated, the client has the ability to pay back the bank. INN: How important is it for advisors to manage cases after the sale? WHITMORE: These are not something that you put on the shelf and then take a look at in five or 10 years. These have to be managed on an annual basis. Part of that management is getting an inforce illustration every year, because you want to see if the policy is performing as projected for collateral purposes. You must also coordinate the interest payment and provide any updated documents the bank may need. INN: Besides IUL, what other products are good for premium financing? WHITMORE: Before we had IUL, we were using premium financing with current assumption universal life, then guaranteed universal life and whole life. They are a smaller portion of the bigger pie in premium financing today. That’s because IULs, in my opinion, are just more flexible and also a lower-cost product than some of the alternatives. People always ask if they can do [variable universal life]. And the answer is no. Because of security regulations, you cannot finance anything that is variable. You have to stick to a fixed product chassis. The other question I get is, can we finance
term? The answer is yes, but it’s never done, because you have to pay back the loan. And also you have no collateral, because term doesn’t have cash value. INN: How can producers and their IMOs be sure that premium finance life is being used responsibly? WHITMORE: It is more important today than I’ve ever seen in my 26-year career that premium financing is designed correctly and also monitored and managed correctly. That is because there are a lot of programs out there today, versus 20 years ago. But on top of that, there are a lot of different IULs and different features in IULs. Take a look at some of the asset multipliers that are out there with charges of 3%, 4%, 5%, upwards of 8%. If you illustrate that it’s going to get 6% annually, then it’s down 8% each year, that does two things. Your loan takeout that you’ve designed in year 12 or 13 might be extended to year 13, 14 or beyond. But also, remember collateral. If the product was illustrated to perform at 6% and now it’s down 16% in two years, you have a huge collateral call. You have to go back to the client and say, “Hey, sorry, but you have to post more collateral.” That can become a huge issue with your clients. We also educate clients on how the program works and the potential collateral that they would post. We have clients sign off on illustrations where the policy is run at 0% for the first two years, where the policy is run at 0% all years, where we stress the borrowing rates. If you’re working with a third-party administrator or vendor that does not do that, I would encourage you to start doing that. Because those are important to have in the file in case the policy doesn’t perform as illustrated and there is a need for additional collateral. You can show you’ve at least had that conversation with the client upfront.
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