High Net Worth individuals ($5+ million) who earn substantial returns in their businesses, in real estate, or any other investment, may be reluctant to liquidate assets to pay for Life Insurance.
However, for savvy clients who understand and appreciate leverage, are willing to post collateral, and can “stomach” the additional risks, premium finance can be used to substantially reduce out-of-pocket costs and/or greatly increase income-focused insurance solutions.
Who Is It For?
Assume you are 50 years old and healthy.
On the left (in orange), you'll see what a typical IUL design looks like without financing.
$50k is paid in per year for ten years for a total of $500k in premium invested. At a conservative annual IRR of 6%, the cash value of the policy would grow to $1.34 million after 20 years. This allows for annual tax-free retirement income of $121k through age 100 (a total of $3.6 million in tax-free income) for $500k paid in.
On the right (in purple), you'll see how premium finance can significantly increase how much income you may have available without any additional funds coming out of pocket.
The premium & interest paid in is still $50k per year for ten years for a total of $500k in premium invested. Working with a premium lending institution (we have several with whom we partner), an additional $500k is paid in annually for seven years (total of $3.5 million). We estimate the loan rate to start at 4.25% and to stress-test the design we assume the interest rate will increase each year 15 basis points, topping out at 6.35% after 15 years.
To further stress-test the design, we assume an IRR of 0% for the first two years of the policy, and then 6% IRR each year thereafter. The cash value of the policy would grow to $6.5 million after 15 years, and then a loan would be taken from the policy to pay-off the lending institution. Now you own your policy free & clear.
After five more years of 6% growth, you could take annual tax-free income of $350k through age 100 (a total of $10.5 million in tax-free income) for $500k paid in.
Non-financed $500k paid in, $121k tax-free income per year for a total of $3.6 million
Financed: $500k paid in, $350k tax-free income per year for a total of $10.5 million
Note: The younger you are when taking out a policy like this, the better the income story will get. You have more time to let the cash value grow, and you'll have a lower cost of insurance weighing on the expense side of the policy.