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?

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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.

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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 31^st? 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.

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