Have You Stress-Tested Your Premium Financing Proposal?

Have you stress tested your premium financing proposal

In order to educate clients on the inherent risks of a premium financing program, it is important to “stress test” any plan proposals. Stress-testing may involve any of the following:

  1. Illustrating the plan using reasonable increasing future cost of borrowing
  2. Illustrating the policy with a lower than current crediting rate, we suggest using 85% of the current rate
  3. Illustrating the combined effect of 1 and 2

The best way to demonstrate the importance of stress testing your premium financing cases can be illustrated by using a real example. Highland was asked to opine on a financed supplemental retirement income design, using a leveraged indexed universal life product. The client, a male aged 40, was to borrow $200,000 a year for ten years, accruing 100% of the loan interest, and repay the third-party loan at the end of year 15. He would then take an income of $434,105 per year for 25 years, beginning year 26 via participating policy loans.

Quick math on the proposed plan design:

✓ $2,000,000 of premium borrowed

✓ $528,000 out of pocket interest payments by the client, amounts over $40,000 accrued

✓ $10,852,625 of tax-free income

✓ $3,157,092 of tax-free death benefit

What could go wrong?

Best Practices: Financing Life Insurance Premiums

There are many ways to fund an insurance program. In most cases, the funding source is the checking account of the client or trust. However, what do you do when your client’s funding needs outpace their available liquid assets or gifting capacity?

Reading the title of this article would lead most to conclude that the focus is on clients who borrow funds from a bank to pay annual insurance premiums. That is not entirely wrong. However, when the team at Highland thinks of financing life insurance premiums, we think in terms of premium funding strategies. That includes commercial premium financing, but also private finance, split-dollar, sales to intentionally defective grantor trusts, and dual loan strategies.

There’s no free lunch

You may be familiar with the phrase, popularized by the award-winning economist, Milton Friedman, ‘there’s no such thing as a free lunch’. Commercial premium financing is no different, this is a pay me now, pay me later proposition. While the initial interest cost is very low, at 5% of the 1st year premium, the cost to simply service the funding escalates quickly reaching 50% by year ten. Not to mention the increasing collateral exposure the client must plan for annually. This simplistic example below assumes a static interest rate environment. An increasing cost of borrowing only serves to increase the ongoing servicing cost, or the outside collateral exposure.

Year-End Product Impacts Due to Principal-Based Reserving (PBR) & 2017 CSO Mortality Table Changes

Did you know that many products available today, which you may be presenting to clients and taking applications, must be placed inforce by the carrier on or before December 31st? You can thank Principal-Based Reserving or PBR and the 2017 CSO Mortality Table changes for accelerating year-end business.

What is PBR and why is it, along with the CSO Mortality Table change, impacting year-end sales?

Hint: It has nothing to do with your favorite beer.

SWAT Underwriting: The Secret to Competitive Offers

Not all cases are created equal when it comes to competitive offers from life insurance carriers — especially on the larger, more complicated high net worth cases.

More than ever, skilled and specialized underwriting makes or breaks the offer. With carriers becoming more particular about diversifying risk and managing capacity, they are inspecting large cases with caution — requiring more medical data and extensive financial information on applications with considerable face amounts, sizable premiums and complex funding strategies.

But it’s not just more information that is required. The information needs to be packaged and pitched to the carriers in a customized way that makes a strong argument for writing the risk.

This requires “know-how” in specialized areas of medical and financial underwriting, case design, advanced planning, and marketing.

Enter stage right — SWAT Underwriting — the secret to competitive offers.





Asset Distribution: The Next Big Wave

The buzzwords over the past 10 years have been asset accumulation and asset allocation.  I propose that if you jump on this bandwagon now, you may be following the wrong paradigm.

Don’t get me wrong, asset accumulation and allocation are still very important. But the next big wave in our industry will be asset distribution.

With 76 million baby boomers approaching retirement, how prepared are you to provide them with a safe, dependable, consistent stream of income?

The skills we acquired in order to have been successful in the past will continue to serve us well into the future — if and only if we use those tools properly.  If the wrong tool is used in a particular situation, the results could be disastrous!

Let’s look at an example:

How a ‘Wait and See’ ILIT Strategy Can Help UHNW Clients

Photo of couple

A Wait and See ILIT (Irrevocable Life Insurance Trust) strategy can provide an essential UHNW (ultra-high net worth) financial planning tool. Among its uses: funding life insurance needs inside an ILIT, even if clients have used up their lifetime exemptions. That’s because a properly designed loan from the client to the ILIT will satisfy IRS requirements for a commercially valid loan, eliminating the need to make taxable gifts.

Here’s an example of how the strategy works.

401(k) Rollovers: A Legal Liability?

Did you know that, as a licensed insurance agent, you could be breaking the law by transferring funds from a 401(k) into a fixed or fixed-index annuity?

If the 401(k) was invested in securities, you could potentially be in hot water because the SEC prohibits unregistered individuals from giving investment advice. In practice, however, the SEC rarely pursues unregistered individuals. FINRA, with its focus on broker/dealers and their registered reps, has little time to oversee insurance-only agents. This type of enforcement tends to be left up to each individual state’s insurance department.

Several states have laid out specific regulations as to what advice can be provided by an insurance-only individual. Conversations around risk tolerance, goals, and general asset allocation are fine. But making recommendation to liquidate securities or which specific security to liquidate are considered investment advice and are illegal unless you are appropriately licensed.

The same rules apply to any other qualified plan rollover, annuity replacement, or brokerage account/mutual fund liquidation.

A $5 Million Tax-Free Birthday Gift of a Lifetime

header photo

After a lifetime of hard work, George Jackson recently sold his business for $100 million. George wanted to celebrate by giving each of his 19-year-old twin grandsons (Jack and John) a special $5 million birthday gift. George has asked his son, Mark, to reach out to their financial advisor for help in structuring the arrangement. Their goal: to minimize the tax implications and ensure Jack and John use the money wisely over their respective lifetimes.

Backstage at Highland: Peg Michails, Director, Policy Review

Highland Capital Brokerage provides superior client service through a vast network of business and underwriting experts. Each of our team members has longstanding experience and is committed to helping you serve clients. BACKSTAGE, our new blogpost series, takes you behind the scenes so you can learn more about your dedicated professionals.

Peg Michails
Director, Policy Review
Highland Capital Brokerage

In her work as a policy review specialist for Highland Capital Brokerage and Premier Trust, a dedicated Nevada-based trust administrator, Peg Michails resolves orphan individual life (no agent of record) and trust-based policies. Her goal: to ensure clients and their beneficiaries get what they were promised.

The passage of time often makes it difficult to understand these cases. Even when brokers of record can be found, they often did not service their old accounts, so there is no track record of beneficiaries, changes of address, policy loans and lapse probability.

‘Wait & See’ ILITs Offer Hedge Against Legislative Risk

retired couple

Recent passage of The Tax Cuts and Jobs Act of 2017 (TCJA) increased the federal unified estate and gift tax basic exclusion amount from $5.49 million in 2017 to $11.4 million per individual and $22.8 million per married couple for 2019.

While this change has been celebrated in many quarters, it has created for clients a false sense of security. The higher exclusion will sunset and revert to $5 million (adjusted for inflation) after December 31, 2025, absent future legislation. The probability is growing more likely Congress will allow the doubled lifetime exemption to sunset, as polls show growing bipartisan support for higher taxes on wealthy individuals.

Federal Estate Tax

Page 3 of 48First...234...Last