WFR | Premium Finance

Premium Finance

Premium Financing Q&A

Business owners and wealthy individuals often rely on outside financing when acquiring a large asset for business or investment purposes. This not only provides potential leverage between the loan costs and appreciation of the asset, it allows the buyer to retain capital for other uses. The same approach, limiting one's out-of-pocket outlay, is also commonly used by qualified buyers when acquiring large life insurance policies.

Current life insurance products provide guarantees based on the issuers ability to pay claims. Insurance products also provide floors and/or low-risk features, which allow lenders to provide 100% collateral credit on policy cash values. Accordingly, premium finance lenders provide loans with low initiation costs, competitive interest rates and little or no collateral required outside of the policy.

Here are some of the most common questions that arise:

1. Why should I finance the premium on my Life Insurance policies? Premium financing is the most cost-efficient method by which to acquire large life insurance assets, once one establishes a desire to do so.

2. Is premium financed Life Insurance "free"? Nothing is free. No. Policy issuers will not underwrite any policy at risk of lapse due to underfunding or changing crediting or interest rates. Accordingly, quality carriers will not issue policies financed with unreasonable loan risk and at least the interest is paid out-of-pocket. (The life insurance industry has internally limited showing unreasonable policy crediting rates.) Policy owners may be able to arrange that out-of-pocket outlay be covered by other collateral, but there is always some level of cost.

3. Are there any commitments, limitations or guarantees required? Yes. Most lenders require personal guarantees and proof of collateral, but it may be possible to get them waived. The collateral required is total loan less the surrender cash value of the policy. Regardless of loan commitment, lenders will do an annual review to make sure the financial stability of the client. For this reason, lenders and carriers require policy owners to have a minimum net-worth of either $5mm or $2.5mm and $500k annual income.

4. Are there early termination penalties on the loan? No. There are no prepayment penalties, so the client can do an early termination if so inclined.

5. What type of policy is used? Whole Life (WL), Indexed Universal Life (IUL) and Variable Universal Life (VUL) are all commonly used. Which one or combination is a matter of what is most suitable to meet the plan objectives and owner's risk tolerance. Private placement vs. registered product (notably VUL) may also be a consideration for larger policies. With all products, policy design, policy expenses and mortality fees are analyzed to help ensure the best success.

6. If the policy underperforms how would this affect in the loan agreement?If the policy were to underperform generally the lender would require additional collateral to cover the gap between the cash value and the total loan. Prolonged underperformance can be addressed in a number of ways, including: 1) adjustments to policy investment sub-accounts (if available); 2) out-of-pocket deposit of premiums; 3) renegotiation of loan rate; 4) reduction of policy death benefit relative to the cash value; and/or 5) policy termination and loan payoff. This risk is why premium finance lenders and carriers limit placement to sophisticated buyers with sufficient financial resources to make adjustments.

7. Are there limits to amount of Life Insurance that can be purchased? Yes. Life Insurance carriers require proof of insurable interest and have both medical and financial underwriting requirements. The financial assessment is thorough but boils down to a future value calculation of income and net worth.

8. How will plan be serviced? Premium financing is a simple concept, but the mechanics can be complex. The loan, policy and plan are serviced in cooperation by: 1) WFR; 2) a national industry leading premium financing partner; and 3) the bank lender; and 4) the life insurance carrier. Our team has a long history of proactive service, with a process in place to track the policy, the loan, the collateral, all within context of meeting the plan's objectives.

9. When and How does the plan end? As part of the pre-purchase process, lenders and issuing carriers require an "Exit Strategy". For older clients, the exit strategy can include loan repayment upon death. However, for most clients who obtain policies at younger ages, loan repayment is typically targeted for 10-15 years using reasonable policy crediting and loan rates. Stress testing of changing rates is part of the pre-purchase process, and a conservative approach that provides more security to the policy owner, the lender, insurance company is routinely adopted. Naturally, this is also routinely looked at within an integrated retirement income and family wealth transfer strategy.

10. How do I know this strategy is right for me and my family? We give you the numbers. We empirically show you the result if you acquire the insurance with or without premium financing, as well as the relative risks. Educated buyers look at the bottom line, often represented by the Internal Rate of Return (IRR) and retained assets. If the IRR and/or retained assets are better with premium financing, under a like-risk or managed-risk scenario, the numbers will tell you it is the right strategy.

See Questionaire below

Premium Financing Questionnaire

The purpose of this questionnaire is to help determine if Life Insurance Premium Financing might be a fit for you or high-net-worth individuals and families you advise. If the questionnaire reveals that Premium Financing may be suitable, we will contact you to discuss a proposal.

We look forward to bringing greater efficiency to you or your high-net worth clients advanced insurance planning!