Legendary solutions for high net worth individuals
Financed life insurance involves borrowing insurance premiums from a third party, such as a bank, in order to pay for an expensive insurance policy, thereby allowing a high net worth individual to retain their own capital. This is a win for the client, the carrier, and the bank. However, it is an underutilized tool due to the complexity and coordination required between all of the parties, and the knowledge and experience required of an advisor to successfully navigate the process.
Legend’s Life Principal, Mark Dombroski, has been nationally recognized as one of the leaders in finance business since its inception. His relationships with insurance carriers, underwriters, and advanced case planning experience ensure that the design is sound, the business is placed with the correct insurance carrier for the situation, and that the lending and insurance process is smooth and coordinated, creating the best possible experience for the advisor and their client. Let’s review a scenario where premium finance was the better option for the client than traditional insurance.
Financing vs traditional non–financed option
A 55yr old male in good health has an estate need of $10 million dollars.
- Traditional design – Annual premium for a life insurance policy is $143K that client pays each year until death
- Finance design – Advisor suggests financing premium for 10 years. Then no additional premiums are needed
- Age: 30-60
- Relatively healthy – most carriers will offer policies up to a rating of 100% premium over standard risk – some survivorship plans can approve at higher risks
- Net worth over 5 million with annual income above $200k – standard guide that most carriers follow, however a few carriers make exceptions
- Need for life insurance – all insurance companies require a financial loss to a family, business or estate to justify the need for life insurance
The client borrows 517k per year for 10yrs at 3% interest for a first-year out-of-pocket interest payment of $15,510 leaving him with $127,490 of retained capital that can then be invested.
Note: If a positive arbitrage between the client’s loan amount and capital earnings is greater than 2%, a financed plan is worth reviewing.
- The Advisor meets with a client to review his estate planning needs, during the visit they decide insurance is a valid solution. At this time the advisor conducts a preliminary review to assist in deciding whether financing is the right choice for the client in lieu of other funding options.
- A follow-up meeting is scheduled for a client presentation to review a sample illustration. At this time clients clarify any questions or objections. If the client and advisor decide to proceed, a fact finder is completed. This is also a good time to identify possible collateral options.
- Attorney establishes an ILIT (irrevocable life insurance trust) to own the policy outside of the estate of the insured/grantor.
- The advisor takes an insurance application, completes additional financing forms, and submits documents to the chosen insurance carrier.
- Client completes bank application and provides required financial documents to the lender.
- When underwriting is complete the insurance carrier and lender make an offer to the client. Client accepts the offer, the loan can now be finalized. Client signs final illustration, financial supplements, and disclosure statements.
- Agent delivers the policy to the owner for signatures and assignment forms and Lender wires in the initial premium so insurance coverage goes in force.
- Each year after: Lender sends premium notices and collateral requirements to the policy owner (typically the trustee). Forms are signed, and premiums are wired to the carrier for that year.