As a financial advisor for a high net worth individual, you’re constantly on the lookout for reliable opportunities to come along that enable your client to maximize their money and leave a lasting legacy for their family. Life insurance premium financing just might be that opportunity.
Life insurance premium financing is a solution that leverages borrowed funds to pay for the premiums of high cash value life insurance policies. This allows borrowers to retain more control over their money to use as they see fit. In addition to funding life insurance, premium financing can also be used for estate planning, business succession, key-person financing and buy-sell arrangements, among other purposes.
But as with any loan program, premium insurance financing isn’t for everyone, even if they do need a substantial amount of life insurance. How can you determine if it’s in your client’s wheelhouse? Here are a few criteria that can help you decide if it makes sense.
Investable assets of at least $5 million
In general, ideal candidates for life insurance premium financing are business owners or individuals whose investable assets are around $5 million. Investable assets can include cash, funds in bank accounts (e.g. checking, savings, etc.), bonds, stocks and CDs (certificates of deposit). Non-investable assets are those that are tangible, like real estate, art or jewelry. These can’t be converted into cash as easily as bonds, stocks and the other examples listed.
Has a variety of assets that can be used for collateral
Collateral is what secures the loan and is something that a borrower surrenders in the event they’re unable to pay off the loan in its entirety when the term expires. Liquid assets are the best collateral vehicles, which can include cash, government-issued securities, letters of credit or the cash value of pre-existing life insurance policies.
If your client doesn’t have these assets, or would prefer not to use them as collateral, it may not be a deal breaker. The cash value of the policy itself may be sufficient since these kinds of life insurance policies accrue interest over time.
Client is not completely risk averse
It’s important to note that life insurance premium financing does contain some degree of risk. Much like prices at the gas pump, a person’s net worth can fluctuate over time depending on economic conditions and other decisions relating to investment or business outcomes. The collateral your client posts may not be sufficient, depending on how the policy performs. Additionally, if the policy underperforms, then your client may be paying more for the loan than the policy’s overall value.
The bottom line here is life insurance premium financing isn’t a risk-free solution and your client should be cognizant of that before proceeding. At the same time, though, even risk-averse clientele may be amenable to this solution since early cash riders can enhance liquidity, frequently just as soon as the policy goes into effect.
Has a clear purpose or goal in mind for use of life insurance
The pandemic caused a lot of heartache, economic pain and loss of life. But the one good thing to come out of it was helping people more fully appreciate the things that truly matter, like their families and loved ones. As a result, life insurance policy purchases soared, with sales rising 2% in the fourth quarter of 2021 compared to 2020 and up 5% on the year as a whole, according to estimates from LIMRA.
But life insurance premium financing can be used for purposes beyond financially supporting your family in the event of a sudden loss. It can also be used as a defense for estate tax exposure, to fund buy-sell arrangements if your client is a business owner or for group life insurance policy funding.
In short, your client should have a specific purpose for life insurance premium financing that you both believe this solution will help address. Additionally, if cash flow is a concern, premium financing can make a lot of sense by increasing their flexibility over how they use their funds. Cash flow is more of a concern for business owners in light of inflation.
Knows how much death benefit they’ll require
One of the biggest miscalculations people make about life insurance is the amount they’ll need. More often than not, they underestimate how much coverage is sufficient. There is no magic number for what is appropriate, given every individual’s family and financial situation is different. But for the most part, the more personal and financial responsibilities your client has, the more coverage they’ll require to address them. These may include things like mortgage payments, tuition for their kids and money for a surviving spouse’s retirement.
The average death benefit from a high-value life insurance policy is substantial, frequently in the millions of dollars. Determining that figure will help you discover if life insurance premium financing is worthwhile for your client.
Has a basic understanding of leverage
Assuming they check off all the boxes for life insurance premium financing, they’re taking advantage of a financial instrument called leverage. Leverage uses borrowed funds from a third party to pay for a certain asset or assets. The assumption going into the purchase is that the value of the acquired asset will rise, thus making the cost of borrowing and paying off interest worthwhile.
So long as your client has a general grasp of what leverage is all about — and the fact that it involves risk, albeit limited — then that should be sufficient. In other words, they don’t need to be an expert on leverage to be a good candidate for it.
Global Financial Distributors specializes in life insurance premium financing through our Leveraged Planning® program. If you believe your client would benefit from life insurance premium financing, given their situation and circumstances, we can help you know for sure. Simply fill out this form in consultation with your client, and we’ll go from there.