PREMIUM FINANCING QUA R T E R LY MAY 2020
INSIDE THIS ISSUE:
PREMIUM FINANCING: KNOWING WHEN TO USE IT AND WHEN TO CALL IN THE EXPERTS HOW TO BUILD A BIGGER DYNASTY IN A LOW-INTEREST ENVIRONMENT
WHAT DO CLIENTS ASK ABOUT WHEN CONSIDERING PREMIUM-FINANCING INSURANCE?
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Premium Financing Quarterly
Premium Financing: Knowing When To Use It And When To Call In The Experts When advising on big cases, having a team of experts ensures the best service and reassures clients.
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ohn Wally does not have to “sell” large insurance cases with premium financing — the right clients will know a good deal when they see it. 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. That is not to say that a premium-financed insurance strategy is right for everyone, or even for every high-net-worth client. But entrepreneurial business clients see the strategy as a no-brainer when they observe the whole design.
Getting The Right Client
Wally serves mostly business clients at his
practice in San Juan Capistrano, in California’s Orange County. So he is starting with a client who understands risk and reward. “Most of my clientele, 95%, are business owners, from food and supplement business to real estate,” Wally said. He also benefits from a close relationship with a large property and casualty agency that refers business clients to him when they have life insurance needs. “They’re the largest insurer of auto dealers in Southern California,” Wally said. “Those are some fantastic clients for me to work with and come in as a specialist. And there’s nobody who understands premium financing better than an auto dealer.” Others who own large real estate assets also understand financing leverage. Wally has clients in hospitality who have plenty of cash flow, but much of their wealth is tied up in their properties. In fact, he was recently helping the owner of several hotels with some estate planning.
In This Issue...
Premium Financing: Knowing When To Use It And When To Call In The Experts When advising on big cases, having a team of experts ensures the best service and reassures clients . PAGE 3
How To Build A Bigger Dynasty In A Low-Interest Environment A large financed life insurance asset protected by a dynasty trust ensures generations of security. PAGE 7
Ask The Expert With Tim Whitmore What do clients ask about when considering premiumfinancing insurance? What are some best practices for premium financing ? PAGE 10
May 2020 3
Premium Financing Quarterly “He is 65, and we’re looking at $30 milGetting Out Before Getting In lion for him and his wife,” Wally said, setFor Wally, it is all about the exit strategy — ting up the conversation. “I tell people, ‘If don’t get clients into premium-financed life we pay traditional, here’s what it looks like. insurance unless you know how they are You pay the premium each and every year paying off and getting out of the loan. That and here’s your number.’” is why he used to use whole life exclusively. The traditional rate showed a decent reBut he ran into its limitations with older clisult for this particular client. “He’s going ents with jumbo insurance needs. to be into this thing for $12 million to $14 “I’ve been using the whole life product million at life expectancy — still a good because we’ve got a guaranteed exit stratreturn,” Wally said in refegy,” Wally said. “The erence to the face value of whole life product works Wally started working fantastic for the younger $30 million. with new indexed The client liked those ages; but for the older ages, universal life models numbers; however, when when you’re looking at the Wally showed how the individuals who are obviprovided by Life client’s return would be ously in need of significant & Annuity Masters even better with premiamounts of insurance, the that were not only um financing, a light bulb whole life product just predictable for turned on. If this worked doesn’t pan out.” clients but also had a for estate liquidity, why But the problem with solid exit strategy. not use it to fund someusing other products is thing else? that agents employed “Well,” Wally started, “first it was for strategies that didn’t always take into acestate liquidity, and then the second afcount an accurate consideration of future ter I did the presentation, he asks, ‘Why costs. That leads to an unpleasant surprise wouldn’t I look at this personally for me on for the client several years into the policy a $30 million level too?’” when they need to pay more than expected The client had a foundation that was al— sometimes a considerable amount more. ready well funded, but it sure could use a Wally started working with new indexed $30 million boost. universal life models provided by Life & “The foundation has significant assets Annuity Masters that were not only prein it now, but life insurance for a foundadictable for clients but also had a solid exit tion, for an individual who’s very philanstrategy. thropic, it just ensures that the founda“I’ve got several significant cases right tion is going to be able to make the wishes now that we’re working on where the client that he has come true,” Wally said. “A lot knows what his interest payment’s going to of people in their 60s don’t have that forebe,” Wally said. “When we tell a client that sight yet.” his interest payment is $200,000, well, the Wally does not have to explain why first year, the interest truly is only $30,000, premium-financed life insurance repbut we’re going to pay the note down.” resents a great value for high-net-worth The strategy is to pay down the interest clients. Like this client, they understand so the client does not face a spike in the init when they see it. terest payment late in the loan. “He goes, ‘You know what? Life insur“We’re really getting right on that obliance is a leverage tool,’” Wally said. “He gation and putting so much emphasis on gets it.” that cash value performing to pay that note
4 May 2020
Premium Financing Quarterly
Premium Financing Case Submission Checklist For each premium financing case, the information below is required by Life & Annuity Masters prior to submitting a case through our network of lenders and carriers. Note that once a lender has been selected, a credit application will also be required. Illustration Checklist State DOB, Sex Rate class Out of pocket outlay or death benefit amount desired Income or protection focused? If income focused, distribution range Total net worth, amount liquid, annual income 1035 exchange? What will client use as collateral? _____________________________ Carrier Submit Checklist Life & Annuity Masters HIPAA Premium financing illustration Fully completed carrier specific application Financial questionnaire/personal financial statement Additional questionnaires for hobbies or marijuana use as needed Bank Submit Checklist Last two years of tax returns (business and personal) to include K1’s Current personal financial statement (updated within the past 6 months) signed by the client Current month bank and brokerage statements to support financial statement Premium financing illustration Carrier illustration (signed or unsigned depending on state and carrier) Government issued ID for the insured, borrower, and trustees Confirmed name of borrower is _____________________________ If trust is to be borrower or policy owner, include trust documents If business is to be borrower or policy owner, include business formation documents May 2020 5
Premium Financing Quarterly off in eight, 10 or 12 years, or however the model design is,” Wally said about paying down principal. “Versus the later years, let’s say 10, 15 years into it when the interest payment due would be $500,000. But the client is still paying only $200,000 because we paid upfront. The businessman understands that model.” Wally saw that IUL beat whole life with a higher internal rate of return, which pairs well with the leverage of premium financing. In the case with his client in the hospitality business, with a traditional model, the client would be paying $12 million to $14 million for the $30 million policy. With the premium financing model, he would be paying $8 million. “That obviously increases your IRR [internal rate of return] on the death benefit significantly,” Wally said. “IRR on the premium financing was a cash equivalent of about 13%.” The nonfinanced option still had a respectable IRR of 8%, Wally said. “But there’s a big difference between 13% and 8%. The business guy gets it right away.”
Calling In The Experts
With premium-financed cases, Wally is often working with ultra-high-net-worth clients worth tens if not hundreds of millions of dollars (although a general rule of thumb says it is appropriate for $5 million net worth and above). Even with Wally’s 35 years of experience, he gets help on these cases from Tim Whitmore, a premium-financing expert at Life & Annuity Masters. Whitmore has modeling and expertise at his disposal to work on tough cases. “We got a referral last week on a case where the advisor said the client’s worth was $200 million,” Whitmore said. There was already an estate plan in place that any other planning would have to work with. “My marketer went down to the whiteboard and whiteboarded the case out and
6 May 2020
asked, ‘What do we do?’ I said, ‘We stop, and we put a call in to Steve,’” Whitmore said. That is Steve Oshins, an estate planning attorney in Las Vegas with expertise in high-net-worth estate planning that involves large insurance cases. After a quick consultation with Oshins, Whitmore got back to the agent. “I reached back out to the agent and I said, ‘Get ahold of the client. Have the client send a message to the attorney to allow the attorney to talk to us about it. Then we will move forward with the plan. Until we get that information, there’s no point in doing anything,’” Whitmore said. “I said that because it has to fit inside the estate plan, and that estate plan had already been drafted.” Oshins said it is imperative in big cases that agents know when to step aside and let the lawyer take over. Not only does that help prevent huge errors, but also it reassures clients that they are in the hands of a competent team. “They use people like me to help separate themselves from their competition,” Oshins said of agents. “It is not just the large cases that can use legal expertise, but any complicated situation,” Oshins said. That usually means potentially difficult heirs, divorce or other family issues. But it is usually the large cases for which he gets called. From Oshins’ experience, those clients tend to be people with significant assets generating large cash flow. That is particularly true of clients who can make double-digit returns on their cash. “It’s not necessarily the size of the policy; it’s more about the client’s cash flow,” Oshins said, describing situations that he has seen involving premium financing. “Someone who has sufficient cash flow to pay $10 million of annual premiums doesn’t necessarily need premium financing, unless they can make more money with their money and would prefer to use other people’s money.”
Premium Financing Quarterly
How To Build A Bigger Dynasty In A Low-Interest Environment A large financed life insurance asset protected by a bulletproof dynasty trust ensures generations of security.
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significant life policies made possible by premium financing. This is a strategy for clients of significant means who want their money to build more wealth in their businesses or other investments.
remium financing is a powerful tool that can help savvy clients • Low interest rates mean this is the best leverage their capital for greattime to leverage capital. Rates have never er gains, particularly for those been this low, so clients can build a subwho want to create a legacy that stantial legacy with a financial institulives on for generations. tion’s money at very little borrowing cost It is getting more difficult for high-netthrough premium financing. worth individuals to set up a financial foundation • The national debt and Advisors and that can touch the lives other pressure on govtheir attorney of their grandchildren ernments will force and generations beyond. partners can offer politicians to look for Tax laws and inheritance money. Successful, higha tool powered rules are limiting the opnet-worth Americans are by life insurance portunities for people increasingly the proposed that can ensure who built substantial estarget for that monetary a client’s name tates to share that wealth source. through their lineage. and intentions But advisors and their A key tool for advanced live on for many attorney partners can oflegacy planning funded by generations. fer a tool powered by life premium financing is the insurance that can ensure dynasty trust. This is an a client’s name and intentions live on for irrevocable life insurance trust that locks many generations, whether that is through in a client’s intentions for generations to a family’s estate or through a foundation. build family wealth. A dynasty trust can Here are just a few reasons why this is an also underwrite foundations that carry on optimal time for advanced legacy planning: meaningful missions for dozens if not hundreds of years to come. Of course, even beyond the factors that • This high level of planning usually requires
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Premium Financing Quarterly make these times perfect for premium-financed legacy planning, any time is a good time because high-net-worth clients are in dire need of high-quality advising. The more that agents and advisors learn about premium-financed life insurance, the more likely they will be to spot holes in a prospect’s current plan and offer legacy-saving advice. This is especially true when advisors and attorneys run into substandard work done by previous advisors and attorneys. Not only is it an opportunity for professionals to call a prospect’s attention to these red flags, it is also a vital service to generations of that family. Steve Oshins, an estate planning attorney in Las Vegas who assists advisors in advanced planning, said he can spot devastating shortcomings in estate structure and equip advisors with critical red flags to share with prospects. An attorney is a key member of a team to bring expertise and invaluable insight to a prospect’s attention. “That’s what I do all day long,” Oshins said. “People, including a lot of life insurance agents, email me the client’s current
life insurance trust and revocable trust.” Oshins can tell pretty quickly whether that client’s estate is heading for trouble, he said. A significant clue is that there is not a dynasty trust. “If the ILIT isn’t multigenerational and isn’t fully discretionary, doesn’t give asset protection and divorce protection, my analysis is that that is a mess,” Oshins said. And that is an analysis that advisors can bring back to the prospect or client. “And then a lot of them come back to me because they went back to the client and said, ‘I had my attorney friend look at this, and it doesn’t give you any divorce and creditor protection for your children. I think we should get him on the phone,’” Oshins said. An agent who has worked with Oshins, John Wally of San Juan Capistrano, California, has seen his share of opportunities come through the door. Wally said he considers it a public service to help clients realize the land mines in their plan and be able to offer a tool to pull
“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 May 2020
Premium Financing Quarterly
Why Dynasty Trusts? Dynasty trusts are irrevocable life insurance trusts that continue for multiple generations, protecting the assets from estate taxes, creditors and divorcing spouses if drafted properly. “Therefore, those are attributes that every client wants or should want,” said estate planning attorney Steve Oshins. “So if we’re talking about millions of dollars, it might as well be in the best-drafted trust.” those clients out of their predicament. “I’ve got a case right now that I was brought in on,” Wally said. “The person is 84 years old now, and it was a horrible model. The agent did a huge face amount and then reduced the face amount after the fourth year.” The plan was 14 years old, and the insurance company was demanding more money. The client’s daughter brought the case and a lot of questions to Wally. “Why do we have a capital call now?” the daughter asked Wally. Wally said, “Fourteen years later, and they got a capital call of more than $400,000. She’s already paid $1.5 million into the policy. And now it’s a $3 million policy because he reduced the face amount.” “I said, ‘You know what? He reduced the face amount after the fourth year. There was no chargeback for the surrender.’ She asked, ‘What do you mean?’ I said, ‘He designed this so he can make as much commission as possible.’” That client’s plan violated Wally’s first rule in putting together a big case with premium financing — start with the end in mind. The design hinges on a realistic plan
to pay off and exit the loan. In this case, there actually was an exit plan. Just not a very good one. “It was designed with an exit strategy — only if mom dies within eight years,” Wally said. “Well, she didn’t.”
Building The Dynasty
Oshins said agents like Wally have enough experience with high-level estate planning to know that a client needs help. Those agents also know when to bring in the expert to do the talking. “The better agents will say enough to get the client interested in doing the advanced estate tax planning but not try to say so much that they back me into a corner,” Oshins said. “The best ones say, ‘I have the perfect estate planning attorney for you, and this is my go-to person. You will love him. Let’s set up a call.’” That call will lead to an expert consultation that clients will appreciate. And once prospects and clients see how a new plan can not only save them money but also build a lasting legacy, they will see the long-view value of premium-financed life insurance.
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Premium Financing Quarterly’s
“ASK THE EXPERT” With Life & Annuity Masters Premium Finance Guru, Tim Whitmore
Premium financing is an effective tool for helping clients buy large policies and leverage the money that otherwise would have gone into premium. But just as these kinds of cases require a top-level advisor to work with premium-financed insurance, it also takes a sophisticated client to appreciate the risks and rewards of using the strategy. In this InsuranceNewsNet interview, Tim Whitmore shares insight into the precautions that responsible advisors should take in assisting clients with financed life insurance. He is not just a marketing organization expert; he also has many years of experience working directly with clients on big cases involving premium financing. INN: In your experience, what do clients ask about when considering premium-financing insurance? WHITMORE: Every client asks, “How does this blow up? Do you stress-test the policy in your designs? Do you stress the borrowing rate? Do you stress the crediting rate?” All of those things have to be done and also presented to the client so that the client is educated on the risk and the rewards. Our clients understand the benefits of arbitrage and using other people’s money, whether they’re purchasing a large building, airport, bar, etc. INN: Because you can’t go internally into some of these policies themselves and see everything, the cost of insurance and interest rates alone don’t necessarily reflect what happens to the policy, even at 0%. How can advisors be sure of their stress-testing? WHITMORE: There are a couple levers on insurance policies. One of the levers the carrier has is obviously the index — what your crediting rate 10 May 2020
is going to be based on. They manage that through various levers, caps, participation rates, floors. But then the other lever they have is cost of insurance charges. You have current, which is what the client is being charged today. And then you have guaranteed levels, what the maximum charges could be in the policy. Finally, some carriers have an assets-based charged multiplier. Some are an unknown black box. I steer clear of those. Those are all shown on all our illustrations. So those are the two levers they can do. When we talk about a 0% crediting rate, or guaranteed crediting rate, that’s as low as we can go on the crediting rate side. I think that’s the fairest option, because we wouldn’t get into these types of designs if we expected to get 0%. INN: What are some best practices for premium financing so an agent can stay ahead of the best interest rules that are most likely to be coming in the near future? WHITMORE: Some people fall into the fiduciary rules and some don’t. But at the end of the day, if you are doing what is in your client’s best interest, then you are doing right by your client. When we look at a premium-financing case, we ask the client, “What are you trying to achieve?” Then we talk about their balance sheet. “What is your net worth? What is your income? What is your liquidity?” We talk about collateral; talk about designing the policy around what we’re going to be paying for interest — our strategies for taking out the loan; and then show them. The benchmark is always: “You need insurance. The traditional way is to pay out of pocket. Well, if we do that, here’s what you get. If we take the same money that you’re going to put toward that policy and you put that toward a premium-financing arrangement, here is the potential benefit of that.”
Premium financing is not a sales tool. It’s not a program. It is just simply another way to fund large life insurance policies. And, in my opinion, a much better and more cost-effective way to do that. If the agent is documenting their files, having those conversations with the clients, educating them on the risks and the rewards, I think they’re operating in the clients’ best interest. It would be well within any of those guidelines that we know are coming up over the next couple of years. INN: Because of new guidelines coming from regulators, is a fiduciary advisor the most appropriate for premium-financed strategies?
pays, 10-pays. It just depends on the client. INN: What are some tough conversations that advanced advisors know they need to have with their clients? WHITMORE: First is why the product they are presenting is best for the client. Second is collateral. A lot of people are using cash value riders. Why? Because it minimizes collateral. The reason is that the agents are afraid to have that conversation with their clients.
“Premium financing is not a sales tool. It’s not a program. It is simply another way to fund large life insurance policies. And in my opinion, it’s a much better and more costeffective way to do that.”
WHITMORE: It’s good to have a fiduciary or someone with a track record of insurance on this level. But in any industry, we have bad actors out there. In insurance, we saw that back in 2008, 2009, with the IOLIs, the investor-owned and stranger-owned life insurance policies. There are still some people out there who are designing strategy in a way that I personally wouldn’t do — and I don’t think is in the client’s best interest. But those are few and far between. INN: What landmines should agents look for?
WHITMORE: A landmine is working with anybody who is going to force you into a particular design or a particular product and/or a particular bank. This isn’t a cookie-cutter approach. This isn’t a one-design-fits-all. It’s designed around the client’s financials and what their objectives are. Depending on what those are, it’s going to be a certain carrier with a certain type of rider with a certain type of pay structure. I’ve heard people say you’ve got to do a 10pay, and it causes me pause. I’ve been doing this a long time. I used to do what I called the step design, where I would pay seven-pay in year one, and then I’d skip the policy out for 10 years and I wouldn’t make another premium payment. Nowadays, I do seven-pays, eight-pays, nine-
If you’ve got a client worth $25 million, and you explain that if we use a cash value rider they are not going to have as much cash value in the policy, and in their income design their income is going to be up to 20% less than if you posted collateral, what do you think their answer is? I don’t want the rider, right? They are going to post collateral because, at the end of the day, if the policy performs as illustrated, then collateral is going to go away. These strategies are for the benefit of clients who know the value of leverage and know the risk. These are typically clients who built their wealth by assessing the positives and negatives of particular risks. They do not have to be sold. They just have to be shown how these strategies help them build more wealth, rather than lock away funds that could otherwise be valuable leverage. They will appreciate all the transparency and information you can give them — if you approach them as a partner rather than as a salesperson.
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