Whether a high-net-worth client desires an additional tax-free income stream during their retirement years, or significant death benefit to pass to their heirs, financing life insurance premiums may enable an individual to earn a spread between expected policy returns and borrowing rate, potentially resulting in a compounding 8-10% tax-free return over time.
That said, life insurance premium financing is not a set it and forget it investment, nor is it one-size-fits-all. In its most effective form, it’s a custom-built strategy with a pulse, and requires frequent care throughout a policyholder’s lifetime.
How advisors analyze and approach the following policy variables, given their client’s objectives, will determine the success of any premium finance deal.
Premium Dollars Going Into the Contract
Q: Is there any benefit to paying some premium dollars out of pocket?
A: The decision to borrow every premium or fund some out of pocket is customizable to each client. A client’s liquidity and investment objective must be taken into consideration when designing and implementing these complex strategies.
Handling Interest Payments
Q: Do I pay interest out of pocket every year or let interest accrue?
A: Paying interest out of pocket or letting it accrue is specific to each client situation. If there is sufficient available collateral and the alternate use of funds nets higher returns than the financed life insurance, it may be advantageous to delay making interest payments. This will depend on each lender and the client’s financial situation.
Q: Do I let the cash in the policy grow for ‘X’ years, then use it to pay the interest?
A: Most well-structured premium finance programs use policy values to make some interest payments before the loan is paid back. The number of years it takes to reach that point will vary depending on client’s age and health profile, financial situation and borrowing capacity.
Securing & Refinancing the Initial Loan
Q: How do I select a lender?
A: As interest rates change and credit markets evolve, it is very important to partner with a team that closely monitors the landscape and has access to a variety of premium finance sources.
When & How to Pay Back the Loan
Q: Do I wait and pay it off at death with the policy’s death benefit?
A: Relying on death as an exit strategy is a dangerous proposition. Every premium finance design is different; there is no one size fits all. One of the most important aspects of this program is the ongoing maintenance and monitoring of the transaction. Our team works with advisors to carefully monitor their client’s policy performance, changing client needs, interest rates and lending sources.
Identifying the Right Partner
There is no shortage of firms that claim to be the experts in premium financing. And while they may “specialize” in premium finance deals, at the end of the day, many firms just saddle clients with an off-the-shelf product. This is far from the customizable, white-glove service a high-net-worth client expects and deserves.
At Schechter, we go well beyond traditional life insurance offerings. We are well-versed in the design and implementation of highly sophisticated techniques. Our technical analysts and legal professionals are constantly scouring the market and conducting in-depth research to find the best possible solutions. We offer a full-service approach: Buying, analyzing, and underwriting the entire insurance process.
We have extensive experience planning large and complex transactions. Our relationships with lenders can get difficult cases completed quickly. Utilize our extensive resources and back office so you don’t have to develop these capabilities yourself and can be freed up to move on to the next opportunity.