ARBITRAGE LEVERAGED INDEX

Transcription

1 LEVERAGED INDEX LEVERAGED INDEX (LIA) is a cash accumulation strategy that has historically been reserved for clients with an average personal net worth of $25 million. However, through unique banking and lending relationships, Lionsmark Capital has produced an exclusive program available to clients with varying levels of net worth. It is designed for individuals, privately held companies, institutions and 501(c)(3) foundations that have a goal of attaining substantial fund growth by participating in bull markets while mitigating risk in bear markets. THE UNDERLYING INVESENT in the Leveraged Index Arbitrage program is an index fund that is correlated with the S&P 500. The index is credited using a 0% floor and a 5-Point Market Shadow. The 0% floor means that if the S&P 500 produces a XXX negative return, you cannot lose any of your gains or your principal balance. The 5-Point Market Shadow means that your index account earns 5- points less than whatever the S&P 500 produces. In other words, if the S&P 500 produces a % return like it did in 2008, your index account would lose 0%. If the S&P 500 produces a % return like it XXXXX The 0% Floor mitigates losses while the 5-Point Market Shadow allows clients to participate in substantial market gains. did in 2013, your index account would be credited % (5.00% less than the gross return). To illustrate the efficiency of this crediting method, between , the S&P 500 produced 4.67% Compounded Annual Growth Rate (CAGR). Comparatively, during this time period, the 0% Floor & 5-Point Market Shadow crediting method produced a 6.72% CAGR.

2 NO TAXES & NO INVESENT FEES The index account is housed inside a life insurance wrapper. The obvious benefit to this structure is that there is a tax-free death benefit that is awarded to the client s heirs upon their passing. This death benefit is typically a multiple of the index s account balance. LEVERAGED INDEX In addition to the beneficial tax treatment of the death benefit, the gains of the index account are taxdeferred and are liquidated on a taxfree basis. Such tax treatment is similar to a Roth IRA, but without the contribution restrictions or the early withdrawal penalties. There are also zero investment fees, unlike a traditional managed investment account, mutual fund or qualified retirement account. FUNDING METHOD These index accounts are typically funded by the client on an annual basis up until retirement age (or whatever age the client decides to withdraw income). However due to the power of the tax-deferred XXXxxxxxx compounding interest, it is advantageous to frontload the index account rather than spreading the payments over several years or decades. Due to cash flow efficiencies, clients will often engage with a bank that will post the funds needed to execute this frontloading strategy. In such a scenario, the client makes interest-only payments to the bank, which alleviates the cash flow and liquidity challenge of frontloading the account using the client s personal funds. Often times, the client will post a small portion of the funds needed in the first year, then utilize the bank s larger contribution in the xxxx second, third, fourth and fifth years, thus leveraging the bank s capital to frontload the index account without using 100% of their own capital. LENDING PARAMETERS Lionsmark Capital s lending partners offer clients very unique lending parameters including: Non-Recourse Loans No Personal Guarantor Requirements No Additional Collateral Requirements These lending parameters result in several benefits for the client including: No effect on the client s personal credit No effect on the client s debt-toincome ratio (DTI) No effect on the corporate balance sheet (if policy is company-owned) Lionsmark Capital s lending relationships and programs are proprietary to Lionsmark and the Leveraged Index Arbitrage Program.

3 REPAYMENT OF LOAN The client may choose which of these three options to exercise at any time. There is no requirement to elect one of the three options at inception of the program. LEVERAGED INDEX There are several repayment options the client may exercise. 1. Early Pay Off Using Internal Funds: There is no pre-payment penalty should the client elect to pay off the loan early. Such repayment may be funded by the present value of the index account at said time. 2. Early Pay Off Using Outside Funds: The client may also elect to pay off the loan using outside funds and keep the originally lent funds growing tax-deferred inside the life insurance wrapper. 3. Pay Off At Death: In many cases, clients will keep the loan in force until death and let the life insurance death benefit pay off the loan. This deferral of loan payoff can be beneficial to the client because the entire borrowed principal continues to grow tax-deferred inside the policy. At the point at which the client would consider paying off the loan using the index account value, Lionsmark Capital will often assist the client in evaluating the mathematical outcome of paying off the loan, versus keep the loan in force and using the index account to fund the annual interest payments. HISTORICAL PERFORMANCE: THE MATH DOESN T LIE We have back-tested and stress-tested the Leveraged Index Arbitrage (LIA) program over the last 10 years, 20 years, 30 years and 40 years. In each one of these time periods, the LIA program produced returns substantially greater than any mutual fund, managed investment account or qualified retirement plan. We also completed a comparative analysis of every 10, 20, 30 and 40-year period within the last century, comparing the LIA program to any mutual fund, managed investment account or qualified retirement plan, and the results were dramatically in favor of the LIA program. FOR MORE INFORMATION: Go to

4 TRADITIONAL PREMIUM FINANCING vs. LEVERAGED INDEX WHAT MAKES LEVERAGED INDEX DIFFERENT? Traditional Premium Financing comes with its fair share of risks including potential negative interest arbitrage from poor policy performance, increasing borrowing rates and additional collateral calls. These challenges typically stem from overleveraging the policy which is rooted in a flawed policy design and poor lending parameters. The end result is a policy that has a cash surrender value net of the loan that is less than the cumulative loan balance. In Traditional Premium Financing, premiums are borrowed starting in the first year of the policy. This leads to a cash surrender value that doesn t break even xxxx with the cumulative loan until several years into the policy. This shortfall between the policy cash surrender value (net of the loan) and the cumulative loan amount requires additional outside collateral. In the Leveraged Index Arbitrage (LIA) program, the client pays the first-year premium in cash, then begins financing future premiums in year two. This a much more conservative way to fund the policy because it creates a minimum 95/5 loanto-value (LTV) between the cash surrender value net of the loan and the cumulative borrowed premium, allowing for nonrecourse loans with Lionsmark s lenders. The argument that novice advisors make is that paying first-year premiums in cash negates the power of leveraging the bank s capital. What these advisors fail to realize is that the first-year interest payment plus the additional collateral requirement in Traditional Premium Financing is typically more cash outlay for the client than the first-year premium in the Leveraged Index Arbitrage (LIA) program. Using the LIA designed program allows the client to enjoy more favorable lending parameters including non-recourse loans, no personal guarantor requirements and no additional outside collateral needed to be posted. The following page illustrates the difference in outcome between Traditional Premium Financing and the Leveraged Index Arbitrage program for a 45-year old with a $10,000,000 death benefit policy. As you will see in the comparison, after the first 10 years of using the Leveraged Index Arbitrage (LIA) program over Traditional Premium Financing, the LIA program produces a: 53.13% lower first-year cash outlay 11.00% lower 10-year total out-ofpocket cash outlay 53.12% greater cash surrender value after the first 10 years into the policy.

5 Age: 45 Policy: Pacific Indexed Accumulator 5 Classification: Male Preferred Nonsmoker Initial Face Amount: $10,000,000 Gross Interest Rate Assumption:..6.48% Carrier Proposed: Pacific Life Insurance Company Assumes Current Cost of Insurance Charges and Current Coverage Charges TRADITIONAL PREMIUM FINANCING Policy Out-of-Pocket Policy Cash Death Projected Outlay Including Surrender Benefit Premiums Cumulative Projected Loan Collateral Policy Value Net Of Collateral Paid Premiums Loans From Loan Interest Premiums Paid Surrender Net Of Lender Year Requirement Out-of-Pocket Borrowed Lender Rate Payments & Interest Value Lender Loans Loans 1-199, , , % -13, , , ,188 9,575, , , , % -27,573-30, , ,038 9,151, , ,204-1,272, % -41,360-20,979 1,090, ,657 8,727, , ,204-1,696, % -55,147-8,612 1,561, ,122 8,303, , ,204-2,121, % -68,933 5,786 2,060,617-60,403 7,878, ,121, % -68,933-68,933 2,164,828 43,808 7,878, ,121, % -68,933-68,933 2,274, ,267 7,878, ,121, % -68,933-68,933 2,389, ,527 7,878, ,121, % -68,933-68,933 2,511, ,980 7,878, ,121, % -68,933-68,933 2,639, ,104 7,878,980-60, ,121, , ,868 LEVERAGED INDEX NO ADDITIONAL OUTSIDE COLLATERAL NEEDED 53.13% FIRST Policy YEAR SAVINGS Out-of-Pocket Policy Cash Death Projected Outlay Including Surrender Benefit Premiums Cumulative Projected Loan Collateral Policy Value Net Of Collateral Paid Premiums Loans From Loan Interest Premiums Paid Surrender Net Of Lender Year Requirement Out-of-Pocket Borrowed Lender Rate Payments & Interest Value Lender Loans Loans , % 0-100,000 42,051 42,051 10,000, , , % -14,819-14, ,714 32,738 9,544, , , % -29,638-29, ,106 50,154 9,088, ,976-1,367, % -44,458-44,458 1,464,340 96,412 8,632, ,976-1,823, % -59,277-59,277 1,997, ,737 8,176, ,823, % -59,277-59,277 2,107, ,578 8,176, ,823, % -59,277-59,277 2,223, ,875 8,176, ,823, % -59,277-59,277 2,347, ,265 8,176, ,823, % -59,277-59,277 2,478, ,230 8,176, ,823, % -59,277-59,277 2,617, ,340 8,176, ,000 1,823, , , % MORE % % LESS CASH 53.12% VALUE 3.77% CASH OUTLAY

6 LEVERAGED INDEX THE MATH DOESN T LIE Lionsmark Capital has the ability to model various products and compare performance during various historical periods of time to mathematically prove which products perform better under different market conditions. Our team will back-test and stress-test our model using four different year periods of time, each with its unique market conditions. The best 20-year period for the S&P 500 was producing a Compounded xxxx Annual Growth Rate (CAGR) of 17.99%, but we also wanted to see how it would compare to other investment alternatives in down markets and flat markets. Thus, we also created the worst hypothetical 20-year period, stacking the worst actual 10-year period back-to-back. During this period ( ), the S&P 500 produced a -0.99% CAGR. Additionally, we back-tested the last 20 years ( ) where the S&P 500 produced a 7.67% CAGR, as well as the last 40 years ( ) where the S&P 500 produced an 11.08% CAGR. In each of these four scenarios, what we found was an indisputable mathematical truth in terms of pure performance. The Leveraged Index Arbitrage (LIA) model s returns out-produced every investment alternative in each of these four year historical periods of time, including: Defined Benefit Plans Managed Investment Accounts Non-Financed Policies Whole Life Policies Buy Term & Invest The Difference Qualified Retirement Accounts SEP IRAs For more information, go to