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Premium Finance Solutions and Applications for the Affluent Individual It’s an opportune moment to explore your future

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2 High net worth individuals have unique challenges when it comes to their insurance needs. They also may have a unique strategy available to them that can provide not just an insurance benefit, but greater tax savings, capital retention, increased returns, and the power of leverage.

This strategy, available to just a select few, is called premium financing, and the Perpetual Wealth System is the pathway to putting it to work as a component of an overall financial plan. Let’s look at this strategy in more detail.

There are four top reasons why people use the premium finance solution to fund their insurance needs.

Leverage Most self-made millionaires and other high net worth individuals are comfortable leveraging their assets

and have already used leverage to create wealth. Premium Finance permits clients to leverage a portion

of their current assets and an insurance policy’s cash surrender value to obtain the coverage they need.

Tax Savings By paying interest instead of policy premiums and by structuring ownership of the life insurance policy properly, clients can minimize gift and estate taxes. Premium Finance can help clients use more of their annual gifting exclusions and avoid tapping into their lifetime exemptions prematurely. The policies can also provide significant taxfavored supplemental retirement income.

Retained Capital

Many high net worth clients earn double-digit returns on their investments, be it in their business, in real estate, or in the market. Premium Finance acts as a compliment to existing investment strategies because it allows clients to keep their money working for them in high-returning asset classes.

Increased IRR

Utilizing premium finance also reduces client outlay in the early years of the insurance policy, which increases the long-term internal rate of return (IRR).

The Strategy - Premium Finance Explained Now that we’ve explored several benefits of premium finance, let’s look at how the strategy works. Capitalizing on the opportunities at the correct time has advantages for the privileged few. In fact, the concept of premium financing of life insurance policies has been around for quite some time.

The main application of this strategy, as previously mentioned, is to enable high net worth clients to purchase the appropriate amount of life insurance to cover their estate tax liability upon demise. This concept, based on the current interest rate environment, can substantially lower the out-of-pocket cost of the plan.

The strategy also can help the gift tax obligations for the client. The gifting value is based on the interest payments rather than the planned premium amount of the insurance policy. The interest can also be accrued to keep the gifts below the annual gift exclusions in certain planning scenarios.

Many new insurance product innovations created over the past few years have led to more solutions for

the qualified consumer to utilize. When done properly through specialized planning, we can and have

helped clients provide protection for their family while keeping the death benefit out of their estates.

The other major planning benefits provided through certain insurance policy features are long term care

if needed and supplemental tax-favored income in retirement. If the policy is designed properly (we stress that proper design is essential), it can have a tremendous impact on a client’s overall financial

plan. The strategy can provide flexibility in covering many unknown life risks. Let’s look at the current economic environment to evaluate the potential of this concept. The strategy consists of borrowing the money from a commercial lender to pay the insurance policy premiums. The current interest rates are determined by the one-year CMT rate plus an additional spread, which will determine the annual rate. In the current historically low interest rate environment, these interest rates

are very favorable.

Creating a Perpetual Wealth Plan - Loan Qualification The objective of the strategy is to service the loan and pay interest to the lender for 10 to 12 years. The policy will then make a lump sum distribution from the cash surrender value and pay back thecommercial lender in its entirety. At this point, the client owns the policy outright.

Up until this point in time, the policy is assigned to the bank as collateral while any collateral shortfall is covered by the individual with a form of a liquid asset.

These assets pledged for collateral can be cash, which is valued at 100%. A brokerage account is valued at a discount ranging from 50 - 80%, depending on the securities held in the account.

1.59%

Figure 1: % of Households that Qualify for Premium Financing in the US

Note: Retirement accounts cannot be pledged as collateral. This is deemed a prohibited transaction by

the IRS. Some individuals may also obtain a letter of credit from their existing bank relationships. The bank usually charges a fee based on the amount of the LOC needed to cover the collateral shortfall. The outside collateral is reduced while the cash value of the policy increases over time. The cash value (CV) will eventually serve as the only collateral needed until the loan is paid back. The CV is usually able to be used as 100% of the collateral need for the loan by the end of the year that the last premium is deposited into the policy by the lender.

The Premium Finance lenders used by Perpetual Wealth System do not charge origination fees on these

types of loans.

Additionally, these lenders will not charge penalties for prepayment of the loan. This allows maximum flexibility for clients. The interest rate can be adjustable or fixed depending on the preference of the borrower. The loans can be underwritten in the name of the individual, a business, or a trust. The interest due is usually paid annually in advance to the lender.

We have found that Fixed Index Universal Life (FIUL) insurance policies have performed well in accomplishing all the areas of planning that are involved in this

transaction, including policy growth through crediting strategies, principal protection, and premium flexibility.

The interest rate is declared in advance annually and will not be adjusted during the given period.

The qualification for the loan is generally a quick and painless process. First, the lender will verify the client’s creditworthiness. Second, the assets for the additional collateral shortfall will be determined and verified by the lender. The loan is a full recourse loan which is 100% secured through this process. The loan amount will not be reported to the credit bureau and/or added to any existing debt obligations. This is a vitally important point, especially to clients who are real estate developers. Their livelihood depends on their ability to borrow as much capital as possible to fund their projects. As stated earlier, this transaction will not deter from their ability to borrow after implementing the premium finance transaction.

Creating a Perpetual Wealth Plan -The Insurance Policy The selection of the appropriate life insurance policy when implementing this strategy is critical for both

the consumer and the lender. The lender does not allow variable life policies to be used in this strategy because the cash value is invested in the stock market. While this can produce gains, it a also produce losses and is too unpredictable. The lender requires the principal to be secure and will not be comfortable with massive fluctuations in the policy value.

A guaranteed fixed universal life policy provides a death benefit guarantee, but these policies provide limited growth and access to the cash value to repay the loan.

Whole life policies could work for estate planning strategies, but policy flexibility restrictions make them less attractive for developing tax-favored retirement income.

We have found that Fixed Index Universal Life (FIUL) insurance policies have performed well in accomplishing all the areas of planning involved in this transaction, including policy growth through crediting strategies, principal protection, and premium flexibility.

The applications apply for estate tax gifting amounts, retirement income, LTC riders. Innovations in policy interest crediting strategies on these policies have also provided more reliable annual credits needed, which is critical for paying the loan obligation back in a reasonable time frame.

Ideally, we project holding the loan for a 10- to 12-year period. The client will pay interest to the lender

simultaneously, allowing the cash value to grow to a reasonable level to support the policy, while still

paying off the lender obligation. Based on our experience, this time frame tends to be the most suitable.

The client needs to work with a specialist that has experience with these products and can help them

design the IUL policy to maximize credited interest. The advisor should also understand the policy crediting method options. Not all policies or carriers are created equal. This is why an advisor with extensive experience is crucial. The strategy and goals of the individual will help in determining the right insurance product and carrier to obtain the desired results. The lenders used

by Perpetual Wealth only work with highly-rated insurance carriers that have a history in the premium finance market. This gives the lender comfort that the strategy will work for the client and, that they will be repaid on the loan. Perpetual Wealth has been utilizing these concepts with clients for nearly 15 years and have helped protect and grow their assets with these strategies successfully.

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4 Distributions

Distributions as Tax Free Income

The distributions inside a life policy can be tax-favored when the policy is structured correctly. This can

provide an alternative income source in retirement. The distributions of the proceeds will not be subject to income taxation or subject to estate taxation when properly designed. This part of the strategy needs the expertise of a qualified estate planning attorney and CPA. –Tax-free distributions for high net

worth individuals should not be discounted or ignored.

Let’s explore this a little further.

High net worth clients are also limited in the amounts and vehicles offered to provide tax-free income in

retirement. The premium deposited in the maximumfunded insurance contract has no contribution limits or income restrictions. By using leverage, the premium finance strategy can substantially increase the amount of capital implored in this tax-free asset class. This allows for a client’s current investments to stay invested.

The investments will not need to be liquidated to fund the necessary insurance premiums. This approach enhances the overall net worth of the client.

The client also pays only the interest payment rather than committing substantial amounts of their after-tax income to fund the larger insurance premium requirements. Rather, they can choose to use these funds for other opportunities or investments. This approach improves diversification of their total

portfolios and asset holdings.

Figure 2: Marginal Tax Rate on Highest Individual Income The question that usually arises from clients on the tax advantages of the properly designed max-funded

insurance contracts is whether to pay the premiums out of pocket or to finance the premiums. Here are

some points to consider: When funding a policy for estate tax reasons, the premium amount is considered the annual gift. Depending on the number of beneficiaries of the ILIT (Irrevocable Life Insurance Trust), it may work. The client also may only buy enough coverage to utilize their annual gifting amount. In 2021, the limit is $815,000, per beneficiary-per person. In contrast, the gift in a premium finance transaction is deemed to be the interest paid to the lender, not the premium deposited by the lender into the insurance policy. We will try to control the impact of the gift by the

loan design and by the type of loan we implement for the client’s particular situation (such as fixed or adjustablerate loans, paying all interest, or deferring and/or accruing part of the interest payments). Each scenario is different, and the solution is custom designed to meet the client’s goals and objectives. These designs help clients to understand the exit strategy, which is based on paying interest for a 10- to 12-year period to the lender. The lender can be paid back through the policy cash values or other assets to keep the policy growing if desired.

The Opportunity The premium finance strategy represents a huge opportunity for qualified individuals to use leverage to

create tax savings, capital retention, and returns. But as we’ve stated, this concept is not for everyone. Less than 2% of the U.S. households can qualify financially for this strategy, based on a qualification of an individual net worth of over $3,000,000. The individual also must qualify for the insurance policy based on their current health status, which is the actual starting place for the strategy. If the client can secure a favorable offer of coverage from an insurance carrier and meets the net worth requirements,premium finance can be a viable potential solution. If you are a qualified individual, you’re already experienced in building wealth. Take the next step in building perpetual wealth by contacting our expert team to explore a custom-designed Perpetual Wealth Plan as part of your overall financial and wealth

strategy.”

“There are risks and costs to a program of action. But they are far less than the long range risks and costs of comfortable inaction.”

John F. Kennedy

Contact Information Daniel P. Wachs CFP, ChFC, CLU Tarkenton Financial 3340 Peachtree Road NE - Suite 2300 Atlanta, GA 33026 630-445-1399

@ Perpetual Wealth System Perpetual Wealth System is an exclusive & bespoke financial planning tool. Our mission is to provide state-of-the-art planning solutions for the high net-worth clients to simplify the world of financed life-insurance premiums. We also partner with advisors and insurance agents to help them implement these advanced concepts with their clients. When these strategies are designed properly, they can help clients keep capital working while provide lasting protection & tax advantages. For more than 15 years, we have worked with advisors and insurance agents to deliver support and advice perfectly personalized for clients.