Premium Financing For Frank Contini

Transcription

1 Financing For Frank Contini Presented By: [Licensed user's name appears here]

2 Financing Preface Borrower and Owner: Frank Contini The primary benefit of a life insurance premium financing strategy is to obtain a significant amount of life insurance coverage at a reduced cash flow cost, and virtually any cash value life insurance policy can be funded in this manner. The loan structure, loan interest, fees, collateral requirements, and personal guarantees associated with this technique will be determined by the lender. A secondary benefit of a premium financing strategy is the opportunity for interest rate arbitrage because the loan interest associated with premium financing may be lower than the policy's non-guaranteed internal rate of return. There are several risks associated with premium financing, some of which are outlined below: Lender risk: Is the loan a term loan that is due in fewer years than illustrated? If so, the borrower will likely be subject to new loan conditions. If the loan is not a term loan, does the lender have the right to demand full satisfaction of the loan at any time? An unlimited right to demand full satisfaction of the loan provides very little security for the borrower. Collateral risk: The lender may limit the form of acceptable collateral requiring only liquid assets be provided. Additional collateral may be required based on a change in the loan requirements of the lender. The policy cash values shown on pages that follow are not guaranteed and may be higher or lower than illustrated. Additional collateral may be required if the actual policy cash values turn out to be lower than illustrated. A personal guarantee may be required. Interest rate risk: In some premium financing transactions, the loan interest is a variable rate which resets annually. If the loan interest is a fixed rate, how long is it fixed? Is this an acceptable condition? Exit strategies: 1. With long-lived insureds, repayment of loans associated with premium financing must be considered, and careful planning should be contemplated in advance to insure a source of funds for this purpose. In some cases, the policy death benefit may be sufficient. 2. In some cases, the sale of the policy to a third party may provide funds to repay outstanding loans. Conclusion: Based on creditworthiness of the borrower, the terms of the lender, and the life insurance company involved, the actual terms of a premium financing arrangement will be different. It is important that the right combination of these three issues be carefully evaluated. Important note: In all cases, be sure to consult with your own legal and tax advisers before entering into this or any other arrangement involving tax, legal, and economic considerations. The approval of these advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans. Page 1 of 17

3 Illustration of s Funding The Plan Borrower and Owner: Frank Contini Owner's Income Tax Bracket Initial 500,000 Initial 11,500,000 After Tax Flow , , ,955 12,014, , ,078, ,803 12,578, , ,693,622 1,350,922 13,193, , ,363,966 2,021,266 13,863, , ,094,824 2,752,124 14,594, ,344,294 3,018,729 14,844, ,613,136 3,308,133 15,113, ,902,902 3,621,888 15,402, ,215,003 3,961,405 15,715, ,550,986 4,328,230 16,050, ,912,686 4,724,201 16,412, ,301,972 5,151,184 16,801, ,720,602 5,610,938 17,220, ,170,787 6,105,674 17,670, ,654,808 6,654,808 18,154, ,174,728 7,174,728 18,674, ,733,240 7,733,240 19,233, ,333,008 8,333,007 19,833, ,976,657 8,976,657 20,476, ,667,066 9,667,066 21,167, ,030,882 3,802,001 3,802,001 14,924, ,972,888 3,972,888 14,699, ,149,206 4,149,206 14,461, ,331,805 4,331,805 14,209, ,521,327 4,521,326 13,941, ,719,029 4,719,028 13,658, ,926,660 4,926,660 13,357, ,146,397 5,146,396 13,039, ,381,238 5,381,238 12,701, ,635,060 5,635,060 12,343,770 2,500,000 6,030,882 *This is an example of an InsMark supplemental illustration for indexed universal life. In an actual presentation, this footnote will refer to an accompanying basic illustration from a specific life insurance company with important details, caveats, and guarantees. Page 2 of 17

4 Illustration of s Funding The Plan Borrower and Owner: Frank Contini Owner's Income Tax Bracket Initial 500,000 Initial 11,500,000 After Tax Flow ,913,107 5,913,107 11,964, ,222,227 6,222,227 11,562, ,571,421 6,571,421 11,135, ,972,568 6,972,568 10,684, ,441,426 7,441,425 10,205, ,998,860 7,998,860 9,697, ,692,521 8,692,521 9,602, ,441,559 9,441,559 10,417, ,249,437 10,249,437 11,296, ,119,651 11,119,651 12,241,830 2,500,000 6,030,882 *This is an example of an InsMark supplemental illustration for indexed universal life. In an actual presentation, this footnote will refer to an accompanying basic illustration from a specific life insurance company with important details, caveats, and guarantees. Page 3 of 17

5 Analysis of Bank Borrower and Owner: Frank Contini Owner's Income Tax Bracket Assumed Bank 5.00% Interest Method Accrued in all s Portion of Paid by After Tax Flow* Used to Reduce Balance Subject to Interest Interest to Accrue Cumulative Due Bank + Origination Fee Paid by Owner , ,000 25, ,000 10, , ,025,000 51,250 1,076,250 10, , ,576,250 78,813 1,655,063 10, , ,155, ,753 2,262,816 10, , ,762, ,141 2,900,957 10, ,900, ,048 3,046, ,046, ,300 3,198, ,198, ,915 3,358, ,358, ,911 3,526, ,526, ,307 3,702, ,702, ,122 3,887, ,887, ,378 4,081, ,081, ,097 4,286, ,286, ,302 4,500, ,500, ,017 4,725, ,725, ,268 4,961, ,961, ,081 5,209, ,209, ,485 5,470, ,470, ,509 5,743, ,743, ,185 6,030, ,030, ,500,000 6,030,882 3,530,882 50,000 * flow is a mix of partial withdrawals and policy loans. Page 4 of 17

6 Analysis of Bank Borrower and Owner: Frank Contini Owner's Income Tax Bracket Assumed Bank 5.00% Interest Method Accrued in all s Portion of Paid by After Tax Flow* Used to Reduce Balance Subject to Interest Interest to Accrue Cumulative Due Bank + Origination Fee Paid by Owner ,500,000 6,030,882 3,530,882 50,000 * flow is a mix of partial withdrawals and policy loans. Page 5 of 17

7 Summary Borrower and Owner: Frank Contini Owner's Income Tax Bracket Initial 11,500,000 Assumed Bank 5.00% and Summary Analysis of the Collateral from Bank to Owner for After Tax Flow Used to Reduce Cumulative Due Bank* - * * (9) Additional Collateral Required , , ,000 12,014,960 11,489, , , , , , ,076,250 12,578,800 11,502,550 1,078, , , , , ,655,063 13,193,620 11,538,557 1,693,622 1,350, , , , ,262,816 13,863,970 11,601,154 2,363,966 2,021, , , , ,900,957 14,594,820 11,693,863 3,094,824 2,752, , ,046,005 14,844,290 11,798,285 3,344,294 3,018,729 40, ,198,305 15,113,140 11,914,835 3,613,136 3,308, ,358,220 15,402,900 12,044,680 3,902,902 3,621, ,526,131 15,715,000 12,188,869 4,215,003 3,961, ,702,438 16,050,990 12,348,552 4,550,986 4,328, ,887,560 16,412,690 12,525,130 4,912,686 4,724, ,081,938 16,801,970 12,720,032 5,301,972 5,151, ,286,035 17,220,600 12,934,565 5,720,602 5,610, ,500,337 17,670,790 13,170,453 6,170,787 6,105, ,725,354 18,154,810 13,429,456 6,654,808 6,654, ,961,622 18,674,730 13,713,108 7,174,728 7,174, ,209,703 19,233,240 14,023,537 7,733,240 7,733, ,470,188 19,833,010 14,362,822 8,333,008 8,333, ,743,697 20,476,660 14,732,963 8,976,657 8,976, ,030,882 21,167,070 15,136,188 9,667,066 9,667, ,030, ,924,310 14,924,310 3,802,001 3,802, ,699,740 14,699,740 3,972,888 3,972, ,461,700 14,461,700 4,149,206 4,149, ,209,380 14,209,380 4,331,805 4,331, ,941,920 13,941,920 4,521,327 4,521, ,658,420 13,658,420 4,719,029 4,719, ,357,900 13,357,900 4,926,660 4,926, ,039,350 13,039,350 5,146,397 5,146, ,701,690 12,701,690 5,381,238 5,381, ,343,770 12,343,770 5,635,060 5,635, ,500,000 2,500,000 6,030,882 *Includes accrued loan interest. See "Analysis of Bank " on Page 4 for details. **This is an example of an InsMark supplemental illustration for indexed universal life. In an actual presentation, this footnote will refer to an accompanying basic illustration from a specific life insurance company with important details, caveats, and guarantees. 30 Analysis Living s 5,635,060 12,343,770 Less Repayment Due: 0 0 Equals to Owner: 5,635,060 12,343,770 Page 6 of 17

8 Summary Borrower and Owner: Frank Contini Owner's Income Tax Bracket Initial 11,500,000 Assumed Bank 5.00% and Summary Analysis of the Collateral from Bank to Owner for After Tax Flow Used to Reduce Cumulative Due Bank* - * * (9) Additional Collateral Required ,964,370 11,964,370 5,913,107 5,913, ,562,210 11,562,210 6,222,227 6,222, ,135,920 11,135,920 6,571,421 6,571, ,684,060 10,684,060 6,972,568 6,972, ,205,080 10,205,080 7,441,426 7,441, ,697,358 9,697,358 7,998,860 7,998, ,602,539 9,602,539 8,692,521 8,692, ,417,550 10,417,550 9,441,559 9,441, ,296,060 11,296,060 10,249,437 10,249, ,241,830 12,241,830 11,119,651 11,119, ,500,000 2,500,000 6,030,882 *Includes accrued loan interest. See "Analysis of Bank " on Page 4 for details. **This is an example of an InsMark supplemental illustration for indexed universal life. In an actual presentation, this footnote will refer to an accompanying basic illustration from a specific life insurance company with important details, caveats, and guarantees. 40 Analysis Living s 11,119,651 12,241,830 Less Repayment Due: 0 0 Equals to Owner:11,119,651 12,241,830 Page 7 of 17

9 Owner's 40 Graphic Analysis Borrower and Owner: Frank Contini $16,000,000 $12,000,000 $12,241,830 $11,119,651 $8,000,000 $4,000,000 $0 $50, s At 40 Less Due Bank $11,119,651 Cumulative s for Fees $50,000 Less Due Bank $12,241,830 Page 8 of 17

10 Rate of Return (ROR) Analysis Borrower and Owner: Frank Contini Initial 11,500,000 Assumed Bank 5.00% Owner's Income Tax Bracket Interest Method Accrued in all s Flow Required from Owner Owner's Owner's Origination Fee Paid by Owner Cumulative Flow Required from Owner Pre-Tax** Equivalent ROR of ROR of * Pre-Tax** Equivalent ROR of ROR of ,000 10, % % 11,489, ,332.67% 114,799.60% ,000 20, % % 11,502,550 5,403.18% 3,241.91% ,000 30, % % 11,538,557 1,522.48% % ,000 40, % % 11,601, % % ,000 50, % % 11,693, % % , % % 11,798, % % , , % 16.50% 11,914, % % , , % 30.41% 12,044, % % , , % 34.55% 12,188, % % , , % 35.60% 12,348, % 89.88% , , % 35.40% 12,525, % 78.40% ,000 1,069, % 34.66% 12,720, % 69.48% ,000 1,324, % 33.69% 12,934, % 62.37% ,000 1,605, % 32.65% 13,170, % 56.58% ,000 1,929, % 31.69% 13,429, % 51.79% ,000 2,213, % 30.44% 13,713, % 47.77% ,000 2,523, % 29.32% 14,023, % 44.34% ,000 2,862, % 28.29% 14,362, % 41.41% ,000 3,232, % 27.36% 14,732, % 38.86% ,000 3,636, % 26.51% 15,136, % 36.63% ,000 3,802, % 25.27% 14,924, % 34.37% ,000 3,972, % 24.17% 14,699, % 32.35% ,000 4,149, % 23.17% 14,461, % 30.54% ,000 4,331, % 22.26% 14,209, % 28.91% ,000 4,521, % 21.44% 13,941, % 27.42% ,000 4,719, % 20.68% 13,658, % 26.05% ,000 4,926, % 20.00% 13,357, % 24.80% ,000 5,146, % 19.37% 13,039, % 23.65% ,000 5,381, % 18.79% 12,701, % 22.58% ,000 5,635, % 18.26% 12,343, % 21.58% 50,000 * After deducting the cumulative loan due to the bank. ** Including a factor for a income tax bracket. Page 9 of 17

11 Rate of Return (ROR) Analysis Borrower and Owner: Frank Contini Initial 11,500,000 Assumed Bank 5.00% Owner's Income Tax Bracket Interest Method Accrued in all s Flow Required from Owner Owner's Owner's Origination Fee Paid by Owner Cumulative Flow Required from Owner Pre-Tax** Equivalent ROR of ROR of * Pre-Tax** Equivalent ROR of ROR of ,000 5,913, % 17.78% 11,964, % 20.64% ,000 6,222, % 17.34% 11,562, % 19.77% ,000 6,571, % 16.95% 11,135, % 18.94% ,000 6,972, % 16.60% 10,684, % 18.15% ,000 7,441, % 16.29% 10,205, % 17.40% ,000 7,998, % 16.02% 9,697, % 16.68% ,000 8,692, % 15.81% 9,602, % 16.14% ,000 9,441, % 15.60% 10,417, % 15.92% ,000 10,249, % 15.41% 11,296, % 15.71% ,000 11,119, % 15.22% 12,241, % 15.51% 50,000 * After deducting the cumulative loan due to the bank. ** Including a factor for a income tax bracket. Page 10 of 17

12 Rate of Return Calculation Logic Borrower and Owner: Frank Contini There are four key columns on the accompanying Rate of Return Analysis report: Rate of Return of Rate of Return of Calculations for the Rate of Return column show the interest rate that would have to be earned on the out-of-pocket cash flow included in plan funding in order to match the net cash value and net death benefit of the policy. Such out-of-pocket cash flow can include one or more of the following: 1) origination fee and/or other loan fees when not added to the loan; 2) Cost of letter of credit; 3) payments not included in the loan; 4) s to the lender for loan interest; and 5) A loan repayment from an outside source. The Rate of Return indicated in these columns would be required for the policy owner to produce a similar result using an alternative tax exempt account. Pre-Tax Equivalent Rate of Return of Pre-Tax Equivalent Rate of Return of Calculations for the Pre-Tax Equivalent Rate of Return column show the pre-tax equivalent interest rate that would have to be earned on the out-of-pocket cash flow included in plan funding in order to match the net cash value and net death benefit of the policy. Such out-of-pocket cash flow can include one or more of the following: 1) origination fee and/or other loan fees when not added to the loan; 2) Cost of letter of credit; 3) payments not included in the loan; 4) s to the lender for loan interest; and 5) A loan repayment from an outside source. This calculation grosses up the Rate of Return by a factor that accounts for the policy owner's income tax bracket. The Pre-Tax Rate of Return indicated in these columns would be required for the policy owner to produce a similar result using an alternative taxable account. Page 11 of 17

13 Comparison of Financing the Income Tax vs. Paying the Income Tax Borrower and Owner: Frank Contini Financing Pay Full * , ,489, , , ,955 12,014, ,000 2, ,502, ,000 1,078, ,803 12,578, ,000 38, ,538, ,000 1,693,622 1,350,922 13,193, , , ,601, ,000 2,363,966 2,021,266 13,863, , , ,693, ,000 3,094,824 2,752,124 14,594, , ,798, ,344,294 3,018,729 14,844, , ,828 11,914, ,613,136 3,308,133 15,113, , ,668 12,044, ,902,902 3,621,888 15,402, , ,274 12,188, ,215,003 3,961,405 15,715, , ,792 12,348, ,550,986 4,328,230 16,050, ,025, ,641 12,525, ,912,686 4,724,201 16,412, ,220,034 1,069,246 12,720, ,301,972 5,151,184 16,801, ,434,567 1,324,903 12,934, ,720,602 5,610,938 17,220, ,670,450 1,605,337 13,170, ,170,787 6,105,674 17,670, ,929,454 1,929,454 13,429, ,654,808 6,654,808 18,154, ,213,106 2,213,106 13,713, ,174,728 7,174,728 18,674, ,523,537 2,523,537 14,023, ,733,240 7,733,240 19,233, ,862,820 2,862,819 14,362, ,333,008 8,333,007 19,833, ,232,960 3,232,960 14,732, ,976,657 8,976,657 20,476, ,636,184 3,636,184 15,136, ,667,066 9,667,066 21,167, ,802,001 3,802,001 14,924,310-6,030,882 3,802,001 3,802,001 14,924, ,972,888 3,972,888 14,699, ,972,888 3,972,888 14,699, ,149,206 4,149,206 14,461, ,149,206 4,149,206 14,461, ,331,805 4,331,805 14,209, ,331,805 4,331,805 14,209, ,521,327 4,521,326 13,941, ,521,327 4,521,326 13,941, ,719,029 4,719,028 13,658, ,719,029 4,719,028 13,658, ,926,660 4,926,660 13,357, ,926,660 4,926,660 13,357, ,146,397 5,146,396 13,039, ,146,397 5,146,396 13,039, ,381,238 5,381,238 12,701, ,381,238 5,381,238 12,701, ,635,060 5,635,060 12,343, ,635,060 5,635,060 12,343,770 50,000-3,530,882 * After deducting the cumulative loan due to the bank. Page 12 of 17

14 Comparison of Financing the Income Tax vs. Paying the Income Tax Borrower and Owner: Frank Contini Financing Pay Full * ,913,107 5,913,107 11,964, ,913,107 5,913,107 11,964, ,222,227 6,222,227 11,562, ,222,227 6,222,227 11,562, ,571,421 6,571,421 11,135, ,571,421 6,571,421 11,135, ,972,568 6,972,568 10,684, ,972,568 6,972,568 10,684, ,441,426 7,441,425 10,205, ,441,426 7,441,425 10,205, ,998,860 7,998,860 9,697, ,998,860 7,998,860 9,697, ,692,521 8,692,521 9,602, ,692,521 8,692,521 9,602, ,441,559 9,441,559 10,417, ,441,559 9,441,559 10,417, ,249,437 10,249,437 11,296, ,249,437 10,249,437 11,296, ,119,651 11,119,651 12,241, ,119,651 11,119,651 12,241,830 50,000-3,530,882 * After deducting the cumulative loan due to the bank. Page 13 of 17

15 Comparison of Financing the Income Tax vs. Paying the Income Tax (Pre-Tax Equivalent Rate of Return) Borrower and Owner: Frank Contini Financing Pre-tax Equivalent Rate of Return Required on Column to Match s Owner's Income Tax Bracket Pay Full Pre-tax Equivalent Rate of Return Required on Column to Match s * , % % 191,332.67% 500, % % 3,838.32% , % % 5,403.18% 500, % % % , % % 1,522.48% 500, % -8.57% % , % % % 500, % 0.71% % , % % % 500, % 5.37% % % % % % 7.95% 83.36% % 27.50% % % 9.49% 66.93% % 50.69% % % 10.51% 55.92% % 57.59% % % 11.22% 48.10% % 59.33% % % 11.73% 42.29% % 58.99% % % 12.11% 37.81% % 57.77% % % 12.40% 34.28% % 56.16% % % 12.62% 31.43% % 54.42% 94.30% % 12.79% 29.08% % 52.81% 86.32% % 12.96% 27.12% % 50.74% 79.61% % 12.96% 25.47% % 48.86% 73.91% % 12.96% 24.05% % 47.15% 69.01% % 12.96% 22.84% % 45.60% 64.76% % 12.96% 21.78% % 44.18% 61.04% % 12.95% 20.86% % 42.12% 57.28% -6,030, % 12.84% 19.94% % 40.28% 53.92% % 12.73% 19.12% % 38.61% 50.91% % 12.63% 18.37% % 37.10% 48.18% % 12.54% 17.69% % 35.73% 45.69% % 12.44% 17.07% % 34.47% 43.42% % 12.36% 16.49% % 33.33% 41.34% % 12.27% 15.96% % 32.28% 39.41% % 12.19% 15.46% % 31.32% 37.63% % 12.12% 15.00% % 30.44% 35.96% % 12.06% 14.56% 50,000-3,530,882 * After deducting the cumulative loan due to the bank. Page 14 of 17

16 Comparison of Financing the Income Tax vs. Paying the Income Tax (Pre-Tax Equivalent Rate of Return) Borrower and Owner: Frank Contini Financing Pre-tax Equivalent Rate of Return Required on Column to Match s Owner's Income Tax Bracket Pay Full Pre-tax Equivalent Rate of Return Required on Column to Match s * % 29.64% 34.41% % 12.00% 14.15% % 28.91% 32.94% % 11.95% 13.76% % 28.25% 31.56% % 11.92% 13.39% % 27.67% 30.25% % 11.89% 13.04% % 27.15% 29.00% % 11.88% 12.70% % 26.71% 27.79% % 11.89% 12.37% % 26.35% 26.89% % 11.93% 12.17% % 26.01% 26.53% % 11.96% 12.19% % 25.68% 26.18% % 11.99% 12.22% % 25.37% 25.85% % 12.02% 12.24% 50,000-3,530,882 * After deducting the cumulative loan due to the bank. Page 15 of 17

17 Comparison of Financing the Income Tax vs. Paying the Income Tax ( Rate of Return) Borrower and Owner: Frank Contini Financing Rate of Return Required on Column to Match s Pay Full Rate of Return Required on Column to Match s * , % % 114,799.60% 500, % % 2,302.99% , % % 3,241.91% 500, % % % , % % % 500, % -5.14% % , % % % 500, % 0.42% 95.22% , % % % 500, % 3.22% 66.00% % % % % 4.77% 50.02% % 16.50% % % 5.70% 40.16% % 30.41% % % 6.31% 33.55% % 34.55% % % 6.73% 28.86% % 35.60% 89.88% % 7.04% 25.37% % 35.40% 78.40% % 7.27% 22.69% % 34.66% 69.48% % 7.44% 20.57% % 33.69% 62.37% % 7.57% 18.86% % 32.65% 56.58% % 7.68% 17.45% % 31.69% 51.79% % 7.78% 16.27% % 30.44% 47.77% % 7.78% 15.28% % 29.32% 44.34% % 7.78% 14.43% % 28.29% 41.41% % 7.78% 13.70% % 27.36% 38.86% % 7.77% 13.07% % 26.51% 36.63% % 7.77% 12.51% % 25.27% 34.37% -6,030, % 7.70% 11.96% % 24.17% 32.35% % 7.64% 11.47% % 23.17% 30.54% % 7.58% 11.02% % 22.26% 28.91% % 7.52% 10.61% % 21.44% 27.42% % 7.47% 10.24% % 20.68% 26.05% % 7.41% 9.90% % 20.00% 24.80% % 7.36% 9.58% % 19.37% 23.65% % 7.32% 9.28% % 18.79% 22.58% % 7.27% 9.00% % 18.26% 21.58% % 7.24% 8.74% 50,000-3,530,882 * After deducting the cumulative loan due to the bank. Page 16 of 17

18 Comparison of Financing the Income Tax vs. Paying the Income Tax ( Rate of Return) Borrower and Owner: Frank Contini Financing Rate of Return Required on Column to Match s Pay Full Rate of Return Required on Column to Match s * % 17.78% 20.64% % 7.20% 8.49% % 17.34% 19.77% % 7.17% 8.26% % 16.95% 18.94% % 7.15% 8.03% % 16.60% 18.15% % 7.14% 7.82% % 16.29% 17.40% % 7.13% 7.62% % 16.02% 16.68% % 7.14% 7.42% % 15.81% 16.14% % 7.16% 7.30% % 15.60% 15.92% % 7.17% 7.32% % 15.41% 15.71% % 7.19% 7.33% % 15.22% 15.51% % 7.21% 7.34% 50,000-3,530,882 * After deducting the cumulative loan due to the bank. Page 17 of 17