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Premium Financing Quarterly

Premium Financing: Best Practices For Best Interest When the leverage of financing can lead to greater gain, it is in the client’s interest to know about the strategy


remium financing is becoming more popular as agents see its value for high-earning and high net worth clients. These clients have all their wealth in a business or a farm, which means a jumbo-size estate for their heirs or partners to handle but no cash to buy the life insurance for proper planning. After all, interest rates have been so low and equity returns so high for so long that premium financing looks like a slam dunk, especially when used with indexed universal life. And although it’s a sound strategy for clients who want to preserve their liquidity or make an arbitrage play, it’s important to note that financing carries risks. That is particularly true in this age of greater transparency and more emphasis on clients’ best interest. Advisors need to be certain that they are not only looking

out for their clients’ interest, but also they are professionalizing their process to provide accountability. To ensure that premium financing is in the client’s best interest, follow these steps.

It All Starts With Life Insurance

Of course, any premium financing arrangement must first start with an assessment of the client’s life insurance requirements. “There needs to be a clear insurance need, which generally means business or estate tax,” explained Mark West, national vice president of business solutions at Principal Financial Group. If the client lacks the liquidity to pay for the coverage, then premium financing not only makes sense but also serves the client’s best interest. “Premium financing is for clients who understand arbitrage and have a better use for their money,” said Todd Ford, president of Executive Retirement Solutions, in Rancho Palos Verdes, Calif.

In This Issue...

Premium Financing: Best Practices For Best Interest When the leverage of financing can lead to greater gain, it is in the client’s interest to know about the strategy. PAGE 3

How To Win With Attorneys And Premium Finance How lawyers and agents trust one another in high net worth cases. PAGE 7

Ask The Expert With Tim Whitmore Why is premium financing so big today? How important is it for advisors to manage cases after the sale? PAGE 10

February 2020 3

Premium Financing Quarterly Best-Use Cases

For many agents, most of their premium financing cases are part of an estate planning strategy. Clients with estates in excess of $11.58 million (for an individual) usually don’t want to saddle their heirs with the federal estate taxes that will be due within nine months of their death. But when an estate is illiquid, that can create a cash crisis for heirs. Premium financing allows clients to purchase a policy large enough to pay the tax but borrow the money to pay the premiums. That allows other assets to remain in the business or in other higher-return investments. “Putting money into a life insurance policy, it’s really dead money,” said Todd Hammer, an insurance agent with Prudential Financial in Stamford, Conn. “They have better uses elsewhere.” Clients also use premium financing for business-purpose life insurance, such as

with a key person strategy. “I have several hedge fund clients,” Hammer said. “If the hedge fund is a ship, they are the rudder. If something happens to them, then the ship is rudderless, and it would cost millions of dollars in a very short time.” Using premium financing to fund key person insurance protects the business after the death of a rainmaker.

No Free Lunch

Although financing offers considerable value, agents and advisors must be careful not to overpromise. The strategy needs to be presented realistically so clients are not under the impression that they don’t have to pay for life insurance. Tim Whitmore, chief marketing officer at Life & Annuity Masters, said that strategy, known as “capitalization of interest,” is dangerous for clients. “Back in the day, and even a little today,

Not everyone is a suitable candidate for premium finance. After the need for life insurance is established, premium financing might be considered as a method to fund the life contract if the client has the following general characteristics:

• Has more than $5 million net worth (for traditional finance) or $300,000 of income. • Needs life coverage for estate tax, estate equalization, liquidity, or for business needs such as stock redemption. • Seeks a high return on assets. • Wants to minimize gift tax exposure. • Feels comfortable using leverage.

4 February 2020

Premium Financing Quarterly some agents promoted no out of pocket for Matching Products With the client. You’re rolling up the interest,” Risk Profiles said Whitmore. “It’s a bad strategy. There’s Once a client’s objectives are identified, it no free lunch in this world.” is time to find the policy that aligns with Most insurers will not even approve polthose goals. icies where clients are rolling up interest, The type of life insurance product that’s Whitmore added. best must align with a client’s goals and “They won’t because there’s too much appetite for risk. A client in real estate, risk involved,” Whitmore said. “Now, for example, is probably comfortable with if the policy doesn’t perform, you have leverage. But someone who built a busia huge loan that’s comness by eschewing debt pounding, getting bigger might want a policy that “At the end of the every year.” requires more skin in the day, you need to Although capitalization game. of interest would comStrategy for insurance make sure that pound the risk for clients, products and their financyou’re designing premium financing has its can accommodate the policy correctly ing own inherent risks that those preferences. and using the clients need to underWhole life, for example, right product with stand. tends to grow a policy’s For example, interest cash value slowly — so the right carrier rates will eventually rise, based on the client’s slowly, in fact, that there and the decade-plus equimight not be enough cash objectives.” ty bull market will evenvalue to pay off the loan. tually reverse. Would preOn other hand, it’s got a mium-financed insurance still make sense steady rate and won’t fluctuate much, even for your clients then? during market downturns. That is where modeling comes in, said Indexed universal life (IUL) products, howWest of Prudential. “Agents can show sceever, have the potential for more growth. Part narios where interest rates increase and/or of the policy is tied to an index, such as the rates of return on the policy decrease, so Standard & Poor’s 500. The policy can benefit they can see the impact,” he said. from the index’s upside — up to a ceiling — Whitmore agreed about the importance but protects on the downside with a floor. of the scenario modeling. He advocates Naturally, both types of policies have showing a range of illustrations, especially their adherents. showing when the policy underperforms “I think the IUL is the better product for a few years. That dip is more likely to because you can get the arbitrage over the occur than is a rapid interest rate rise or cost of money,” Hammer said. equities market collapse in the next 10 years, Whitmore said. Even two years of Have An Exit Strategy underperformance can require the client With any policy, clients need a clear underto put up more collateral. standing of how their premium financing “At the end of the day,” Whitmore said, loan will be paid off, said West. “you need to make sure that you’re design“Prior to sale, financial professionals ing the policy correctly and using the right should discuss a premium finance exit product with the right carrier based on the strategy, including an exit strategy alternaclient’s objectives.” tive using outside funds if the policy cash

February 2020 5

Premium Financing Quarterly value is not sufficient,” West said. “[Agents] should require premium finance interest to be paid and not accrued each year.” Whitmore said the key to a good exit strategy is a strong structure and running stressed scenarios. Agents should resist the urge some clients have to play it a little risky, such as not paying interest and just presenting AG49 crediting rates. Collateral can also be a stumbling block. “I ask the client, ‘Look, when you bought your house, did you post collateral? When you buy a car, do you post collateral? When you got into that commercial property, did you post collateral?’” Whitmore said. “So why should this be any different? By posting collateral, it allows you to finance the policy and get the insurance needed in a much more cost-effective way.” In fact, that answer demonstrates the

value of premium financing. In an example of a $200,000 annual premium, premium financing would end up saving serious money. “That money’s gone,” Whitmore said of the annual premium. “With a premium financing design, you’re out of pocket, say, $25,000 a year in interest. That’s an extra $175,000 in cash flow. What do you earn on your money? 12%? What is 12% compounded return on $175,000 a year for the next 10 years?” Whitmore explained that is the value the client is getting with the collateral — leverage. And even beyond that, the financing and the insurance work in tandem to mitigate risk. “All life insurance is doing is transferring risk, from the individual to a company,” Whitmore said. “It’s also leverage. I pay $100,000, I get a $2 million death benefit. Premium financing is another leverage. Instead of paying the $100,000, I’m having someone else do it. And I’m only paying $5,000. It’s another lever up.”

“By posting collateral, it allows you to finance the policy and get the insurance needed in a much more cost-effective way.”

6 February 2020

Premium Financing Quarterly

How To Win With Attorneys And Premium Finance How lawyers and agents trust one another in high net worth cases


s a life insurance agent, your relationship with your clients is sacred. Yet there are times when other professionals should be brought in to provide the client with solutions that go beyond insurance and help position you as a holistic problem-solver. At no time is that more apparent than when it comes to using life insurance with ensures that clients’ interests are protectpremium financing for estate planning. Beed. And in all likelihood, it will lead to even cause premium financing is often used for more planning for your client. estate planning, a trusted attorney ensures Maintaining a roster of savvy estate that the policies and payments are strucplanning attorneys is key. It takes time to tured in the most taxbuild that list. It might favored way. be a process of trial and Estate planning “When structured error before you find that lawyers can protect properly, premium financthe attorneys understand ing is a great way to save how to use sophisticated clients’ estate tax the client money and gift life insurance strategies to exemption and taxes,” said Todd Ford, solve the thorniest estate maximize their president of Executive Replanning issues. But laywealth transfer. tirement Solutions, Raning that groundwork is in cho Palos Verdes, Calif. the best interest of clients. “We work as a team with estate planning And don’t forget: Estate planning lawattorneys to solve each client’s unique esyers can be another avenue of referrals for tate planning challenges.” your own business. Learn how to get to know the good For The Good Of The Client ones and start providing even more value By setting up the appropriate trusts for to clients. the insurance, estate planning lawyers can protect clients’ estate tax exemption and Learning To Work Together maximize their wealth transfer. An inThe agent/attorney relationship can take troduction to an estate planning attorney several paths. In some scenarios, attorneys

February 2020 7

Premium Financing Quarterly spot a gaping estate tax liability problem that they believe can be solved with life insurance. Savvy attorneys can even explain that if liquidity is a concern, premium financing can be used to acquire the appropriate amount of life insurance. They can connect those clients with an agent to get the life insurance in place. By the same token, there are times when agents are the first point of contact with clients. In the course of helping them get the right policy to address their estate planning, agents want to know that clients have structured their estate plan in a way that optimizes their life insurance and doesn’t create further tax liabilities, so clients may need to connect with an attorney. Then there are times when clients already have their team in place, but they need open communication between estate planning attorneys, accountants and agents to get the job done. “What often happens is that if clients like the idea of premium financing, they’ll have me speak to their attorney,” said Todd Hammer, a high-net-worth agent with Prudential. “Seven times out of 10, the estate

attorney is not familiar with the strategy.” Those are opportunities to educate attorneys as well, Hammer said.

A Team Close

Educating attorneys and accountants is part of the process for Tim Whitmore, chief marketing officer at Life & Annuity Masters. “At the end of the day, if a CPA or an attorney doesn’t understand something, what’s their answer?” Whitmore asked. “‘No,’ right?” One way to educate them is by doing a pre-meeting with the advisory team — but not with the client, so that the the advisors don’t feel put on the spot. Even if the attorney or the CPA does not sign on to the deal, Whitmore said it is still a win because at least he has educated the professionals about the strategy. Before the pre-meeting, Whitmore has already gathered information from the

“If I come in with a plan and then the attorney has a different idea of what they want to do, it’s never going to happen.”

8 February 2020

Premium Financing Quarterly

How Estate Planning Leads To Financing Insurance

An estate planning attorney urges his real estate client to seek out premium financing With an estate worth $70 million, Steve Oshins’ real estate investor client has a large life insurance need. His client is divorced, so his federal estate tax exemption is $11.58 million, thanks to recent reform, said Oshins, an attorney in Las Vegas. At a 40% rate, that leaves an estate tax bill of more than $23 million. Sure, the client’s heirs could sell off the properties, one of which alone is worth $40 million. But real estate is notoriously illiquid, and estate taxes are due within nine months of death. Further complicating the situation is that the client also lacks liquidity to pay the premium on a $20+ million policy. In addition to having the bulk of his money tied up in the properties, the client’s income consists of periodic refinancing of the properties. Those circumstances make him a prime candidate for premium financing. “In this case,” Oshins said, “I referred him to an insurance agent because I saw what his estate tax exposure was.”

client, but he is not going to that meeting with all the details. “For the meeting with the advisors, I bring my business card,” Whitmore said. “I don’t bring illustrations. I don’t bring any numbers. It’s a conceptual sale and about getting the advisors on board.” Whitmore learns what the advisors know about insurance and premium financing and if they have any bias. He also learns about the larger context of the estate plan. “If I come in with a plan and then the attorney has a different idea of what they want to do, it’s never going to happen,” Whitmore said. “With the collaborative process, it’s a holistic planning process with their attorney. Because this is an estate tax issue, he’s going to be the architect

of the plan. The premium financing is just a strategy within that plan.” Then if the attorney or the CPA is on board, they not only support the sale but also make it an integral part of the overall plan for the client. In essence, they sell the insurance and financing when they meet with the client. “At that meeting, it’s going to be the client’s advisors,” Whitmore said. “I go in. The CPA is there, the attorney’s there, the insurance advisor and the client. We then walk the client through the strategy. At that point, it’s a strategy where everyone is on the same page, and it’s going to be recommended by the attorney, CPA and all their advisors. The likelihood of a client moving forward is greatly increased.”

February 2020 9

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

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.

February 2020 11

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PremiumFinanceU.com Premium financing has some additional risks not found when a client purchase a policy without financing. These include collateral, interest rate and other risks. Clients should always consult their qualified tax and legal advisor before purchasing a financed policy.

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Premium Financing Quarterly - February 2020  

Brought to you by Life & Annuity Masters.

Premium Financing Quarterly - February 2020  

Brought to you by Life & Annuity Masters.

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