For producer use only. Not for distribution to the public. OLA 1854 T Growing Your Business by Serving the High Net Worth Market

Transcription

1 For producer use only. Not for distribution to the public. OLA 1854 T 1008 Growing Your Business by Serving the High Net Worth Market

2 This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here. 2 For producer use only. Not for distribution to the public.

3 The Problem Consistent messages from high net worth clients: I make an excellent rate of return on my money in my own business, so it doesn t make the best financial sense to pay large premiums to a life insurance company. My money is tied up in highly profitable investments. I just don t want to sell off my assets to pay the premiums for the coverage that I need. 3 For producer use only. Not for distribution to the public.

4 The Solution Premium financing allows clients to: Purchase the life insurance needed to accomplish their financial goals Borrow the premiums and pay back the loan with the death benefit or another exit strategy Keep high-performing investments in place, without having to liquidate to pay premiums 4 For producer use only. Not for distribution to the public.

5 What Is Premium Financing? Premium financing is a sophisticated strategy that allows high net worth individuals who need a large amount of life insurance to leverage their assets in order to pay premiums. 5 For producer use only. Not for distribution to the public.

6 What Premium Financing Is Not NOT a way to find premium dollars when the ability to pay premiums does not exist NOT a simple strategy NOT a method that reduces the cost of buying life insurance 6 For producer use only. Not for distribution to the public.

7 What Premium Financing Is Not (cont.) NOT designed to allow clients to purchase life insurance they couldn t otherwise afford NOT a method of selling life insurance to a client who would not otherwise have the need for insurance 7 For producer use only. Not for distribution to the public.

8 How Premium Financing Works Simply defined: A means of borrowing money to pay life insurance premiums Interest is paid annually or accrued Loan balance is collateralized at some level Death benefit or another exit strategy is used to repay loan principal 8 For producer use only. Not for distribution to the public.

9 How Premium Financing Works (cont.) The Process: Part A Insurance professional works with Transamerica Premium Financing team to: Confirm eligibility and appropriateness Identify acceptable lending programs Provide case design and proposals Work through concerns and questions from the client and his or her advisors 9 For producer use only. Not for distribution to the public.

10 How Premium Financing Works (cont.) Part B A financing package is submitted to the lender Part C An underwriting package is submitted to the carrier Parts B and C occur concurrently 10 For producer use only. Not for distribution to the public.

11 How Premium Financing Works (cont.) Part D: Finalizing the Process The lender reviews the loan package and prepares a loan offer The client approves the loan offer Medical underwriting is completed Policy issued The lender wires premium payments to Transamerica and the policy is placed in force Collateral assignment is recorded 11 For producer use only. Not for distribution to the public.

12 Typical Client Characteristics 60 to 80 years of age with a tangible net worth greater than $5 million (excluding the residence) Business owners with the majority of their assets fully invested and illiquid A need for life insurance with a premium requirement of more than $100,000 per year 12 For producer use only. Not for distribution to the public.

13 Typical Client Characteristics (cont.) Trust grantor may be subject to gift taxes, if gifts to pay loan costs exceed exclusion amounts Wealth is illiquid, but assets are available for use as collateral and can be liquidated at a later time Demonstrate an understanding of financial leveraging and are comfortable with the financing concept 13 For producer use only. Not for distribution to the public.

14 Interest Payment Options Interest Paid Currently The loan is for the amount of premiums only. The client pays the interest in advance or in arrears to the lender out of own funds. If policy cash surrender value exceeds the cumulative loan amount, withdrawals may be taken from the policy to pay interest* * Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse. Please refer to your individual contract for provisions. 14 For producer use only. Not for distribution to the public.

15 Interest Payment Options (cont.) Interest Accrued on the Loan Client does not pay the annual interest costs to the lender. Annual interest due is added to the cumulative loan principal and paid out of the policy death benefit at the insured s death. Out-of-pocket costs are those related to the loan itself, such as loan origination fees Cumulative loan balance may quickly exceed the death benefit when accruing interest 15 For producer use only. Not for distribution to the public.

16 Interest Rates and Loan Structure The interest rates charged on premium financing loans vary by lender, but are typically based on LIBOR or Prime plus a possible spread The period of time for which the interest rate is fixed will affect the rate charged Generally, larger loans have lower rates Lenders may charge a loan origination fee or other fees that will increase the total cost of borrowing 16 For producer use only. Not for distribution to the public.

17 Interest Deductibility Individual taxpayers generally cannot deduct personal loan interest IRC Section 264 will disallow a deduction if the loan is used to purchase life insurance and the business has an interest in the policy 17 For producer use only. Not for distribution to the public.

18 Collateral Each lender s collateral requirements will be different Fully Collateralized: 100% of the cumulative loan balance is collateralized by the policy cash value and assets other than the pledged policy by the insured Reduced Collateral Loan: Insured provides a minimum of 25% collateral, in addition to the policy cash value, as security against the cumulative loan used to pay premiums 18 For producer use only. Not for distribution to the public.

19 Types of Collateral Lenders usually prefer certain types of collateral over others, and may allow: Cash Letters of credit CDs Policy CSV Traded securities Personal guarantees Government bonds CSV of other policies 19 For producer use only. Not for distribution to the public.

20 Gift Tax Leveraging Policies owned outside the insured s estate that are premium financed may eliminate the need to gift the entire premium Only loan interest may need to be gifted The loan interest may create gift tax liability if it exceeds available exclusions and exemptions Interest deferral increases the gifting leverage No need to gift premium or loan interest Does create a balloon note 20 For producer use only. Not for distribution to the public.

21 Exit Strategies Death of the Insured Generally, simplest, most straightforward option May need to reconsider if interest is deferred or loan costs increase Cash Value Option Withdraw cash from the policy's cash surrender value to pay back all, or a portion of, the loan balance Grantor Retained Annuity Trust (GRAT) 21 For producer use only. Not for distribution to the public.

22 Exit Strategies (cont.) Use of a Term Policy By financing a UL policy and accruing the interest, while also purchasing a term policy equal to the amount of the cumulative loan, the client s out-of-pocket expense may be lowered. Payments are fixed for the entire term of the loan by the term policy premiums Loan Repayment via Outside Funds If Liquidity Event Occurs Outright gifts Liquidation of a business interest Existing assets already held by policy owner Charitable Lead Trust 22 For producer use only. Not for distribution to the public.

23 Benefits to Client Reduces client s cash outlay in early years Life insurance cash surrender value may serve as portion of the collateral Attractive interest rate on borrowed funds LIBOR vs. Prime Client may not have to liquidate assets 23 For producer use only. Not for distribution to the public.

24 Benefits to Client (cont.) May produce a positive arbitrage if loan interest rates are lower than crediting rates Depending on lender, loan may be paid off at any time without prepayment penalty or paid upon the death of the insured 24 For producer use only. Not for distribution to the public.

25 Risks Loan Interest Rate Risk Interest rates may only be locked in for a limited period of time (e.g., 1 10 years) A rise in rates could result in additional collateral, less net death benefit, etc. Interest rates will fluctuate over time 25 For producer use only. Not for distribution to the public.

26 Risks (cont.) Policy Crediting Rate Risk Crediting rate may be less than anticipated interest rate Collateral Call Risk In the event of a loan default, supplemental collateral could be called Decreased policy interest crediting rate could lead to a collateral call 26 For producer use only. Not for distribution to the public.

27 Case in Point Michael, age 65 Life insurance need established at $5,000,000* Annual premium of $104,948 for non-financed premium Annual premium of $172,774 for financed premium; guaranteed, with return of premium death benefit * Male, 65, Preferred Nonsmoker, TransACE 27 For producer use only. Not for distribution to the public.

28 Case in Point (cont.) Year 10 Cumulative Results Policy cost by not financing Interest cost by financing Difference in paying interest vs. paying premiums $1,049,480 $570,154 $479,326 Loan interest rate assumed is 6% 28 For producer use only. Not for distribution to the public.

29 History of Premium Financing Personal Funding of Premiums Insurance is based on need Insurance is tax advantaged Premiums paid by the owner on an after-tax basis 29 For producer use only. Not for distribution to the public.

30 History of Premium Financing (cont.) Traditional Premium Finance Real need for insurance High net worth individuals began leveraging by using a bank s funds Loans are 100% collateralized and interest is paid annually The goal was to have the capital invested in high performing assets (small business, alternative investments, etc.) with return greater than the premium finance loan interest rate 30 For producer use only. Not for distribution to the public.

31 Alternative Premium Financing Approaches Inappropriate Use of Premium Financing Investor origination rather than real need No Risk or Non-Recourse financing approaches Two-Year Fund and Flip Fundamental shift in the market Producers and program sponsors begin pitching the financing before the insurance Free insurance inducements 31 For producer use only. Not for distribution to the public.

32 Other Types of Programs Inappropriate Programs Stealth Investor programs do away with the financing altogether Instead: Transfer trust certificates, sell put options, convertible term funded by the producer Structure around the carrier questionnaire 100% investor driven No insurance need present Cash inflow to the client No outlay for the client 32 For producer use only. Not for distribution to the public.

33 History of Premium Financing Current Trends in Financing Financing based on a real insurance need Reduced collateral Term of years is flexible Interest deferral Note: Beware of unreasonable loan costs 33 For producer use only. Not for distribution to the public.

34 Legal and Tax Considerations Premium financing has insurable interest as well as tax implications in a number of areas including estate, gift and income taxes Increasing state concerns in new laws and regulations aimed at abusive approaches Clients must rely on their independent legal and tax advisors to navigate through the various tax and legal issues 34 For producer use only. Not for distribution to the public.

35 Why Premium Financing? Borrowing premiums allows current investments to remain intact There may be tax and economic consequences associated with liquidating the assets The continued growth of assets may be a better use of money May reduce annual gifting requirements Premium financing could be one possible strategy to reduce annual gifting 35 For producer use only. Not for distribution to the public.

36 Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively Transamerica ), and their representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties should rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal laws in effect at the time of publication. However, these laws are subject to interpretation and change, and there is no guarantee that the relevant authorities will accept Transamerica s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects. Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of April TransACE is a nonparticipating, flexible-premium universal life insurance policy issued by Transamerica Life Insurance Company, Cedar Rapids, IA Policy Form # , Group Certificate # for certificates issued under a group policy issued to the Rhode Island National Consumer Protection Trust. Policy form and number may vary and this policy may not be available in all jurisdictions. TransACE NY (Policy Form # CVAT) is a nonparticipating, flexible-premium universal life insurance policy issued by Transamerica Financial Life Insurance Company, Purchase, NY This product is available only in New York. Transamerica Financial Life Insurance Company is authorized to conduct business in New York. Transamerica Life Insurance Company is authorized to conduct business in all other states. 36 For producer use only. Not for distribution to the public.

37 For producer use only. Not for distribution to the public. OLA 1854 T 1008 Growing Your Business by Serving the High Net Worth Market