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Premium Financing. Introduction.

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Premium Financing

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Premium Financing


Introduction l.jpg

Introduction

  • Over the past few years, there has been a multitude of changes from the traditional premium finance approach to the non-recourse process and just about everything and anything in-between. Finally, there has been significant settlement with funders and participating life carriers. This specialty market requires knowledge and experience in dealing with life insurance companies and funders.

  • To provide this expertise to you, Rocky Mountain Insurance Network has entered into a strategic alliance with Viking Capital. Viking Capital has many years of experience and has developed relationships with the primary funders in the premium finance arena.

  • We feel that the combination of Rocky Mountain Insurance Network’s expertise on the life insurance side and Viking Capital’s expertise on the financing side provides you, the broker with the best combination available.


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Premium Financing: What is it?

Premium Financing is the financing of a fixed life insurance policy by a third party lender. Similar to a home or auto loan secured by the property, a premium finance loan is secured by the life insurance policy.

  • Why would a bank (lender) loan money for life insurance premiums?

    • The default rate on this type of loan is very low. Everyone will eventually die and the policy will pay. The loan is very secure compared to home loan foreclosures and auto loan default rates.

  • Why would an affluent senior choose premium financing?

    • Premiums for Universal Life (permanent) policies are expensive. Many seniors are asset rich and do not want to liquidate assets to pay for premiums.


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Why should your prospects consider premium financed life insurance?

  • Need for capital to settle their estate * (make whole)

  • Want to leave money for heirs

  • Want to leave money to charity (legacy creation)

  • Land owners/ farmers/ ranchers do not want to sell existing property to settle their estates *

  • Need for immediate capital

  • Looking for coverage for specified period of time

  • * Under current law, the 2001 Act sunsets on 12/31/2010, resulting in a reversion to the applicable law prior to the 2001 Act. $1,000,000 exemption then up to 55% tax rate. As of yet congress and the senate have not repealed the death tax.


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Is this legal?

Yes. Absolutely. As legal as a mortgage or an auto loan.

  • Are the parties involved legitimate?

    • Yes, the banks (lenders) have drafted loan programs and have submitted these programs to the carriers (insurance companies) for approval. Large legal teams have reviewed legitimacy and financial concerns from both sides. Some of the largest banks and insurance companies in the world are involved in premium financing. There are many financing options based on the needs of the client and some programs require legal and/or CPA involvement.


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Who qualifies for premium financing?

The best clients are:

  • Male age 72-85*

  • Female 74-85*

  • Net worth 1M with no maximum

  • Good health - insurable at standard or preferred

  • Multiple impairments are never good, but insurance companies consider “age appropriate” medical conditions and the need for premiums. Table shaving exists, so discuss your case/medical conditions with us.

  • Note - other ages may work as well. As young as 65-M or 68-F up to age 89.


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    How long has premium financing been around?

    People have been borrowing money to pay for life insurance for more than 150 years but structured programs from institutional lenders have been used since the early 1970’s by very wealthy individuals.

    • Why haven’t people heard about this until now?

      • In the past, the lenders only extended premium financing loans to very high net worth individuals and generally for policies with a death benefit of $5,000,000 or higher. Structured premium financing programs are now available for policies with a death benefit as low as $250,000.

    • Will a client have a moral objection?

      • If the client is OK with a mortgage or a car loan he or she can be OK with premium financing. Conceptually it is the same.


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    Selling the concept of premium financing:

    An insurance policy is an asset just like a house, car, raw land or a bar of gold. This is because the policy will pay a death benefit when the insured dies or the policy can be sold on the secondary market.

    • Example: Male/Non-smoker/age 75/Policy was issued standard.

      • $1,000,000 Policy (death benefit)

      • $45,000 annual premiums

      • $30,000 cash surrender value (end of year 2)

      • $145,000. Secondary market value. (14.5% of face)


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    A valuable opportunity for qualified seniors

    Once a client understands the value of a life insurance policy, he or she will also understand the value of insurability. Tapping into this value in a timely manner is important because as we get older the insurability window is always closing.

    • If you have a client that meets the following criteria you have an opportunity to provide a valuable service to that client and their estate:

      • The need-$ for a multitude of reasons

      • The net worth-$1M or more

      • The proper age-72-85 or more

      • Insurable-Average to good health


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    The pitch is harder than the close…BY FAR

    Getting the client to understand the concept of financing life insurance premiums and trust you with sensitive matters such as death, medical records, social security numbers, net worth etc. is more difficult then actually closing a case.

    • Why?

      • The answer is simple. If a case works, it works. The value will far outweigh any risk. The client and/or CPA and attorney will say, “There is no reason NOT to do this.” By the way, you will probably get referrals from the CPA and attorney.


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    Available programs

    • 1. LIFETIME LOAN

      • Designed to pay death benefit when insured passes away

      • Low risk

      • Low collateral (if any) Recourse loan

      • Larger policies (due to sliding scale projected death benefit)

    • 2. TERM LOAN

      • 2-10 year terms

      • Designed to pay premiums for a fixed period of time

      • Gives client options

      • Low collateral (if any) Recourse loan

    • 3. OPTION LOAN

      • Designed to pay client today (2-4% of face)

      • Generally higher risk due to chance of carrier cancellation

      • No collateral required. Non-recourse loan

      • Drawbacks include: Selling insurability for little return. Policy will likely be worth 3-15 times more if held for 2 years. Ask us about Option Loans.


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    The process - start to finish:

    • Agent provides questionnaire, HIPAA and insurance information release to us along with net worth, defined need, amount of insurance sought and complete list of physicians.

    • We order all medical records. (APS) (1-4 weeks)

    • We order two life expectancy reports. (LE’s) (2-4 weeks)

    • We send case to insurance carriers (informal.) (2-3 weeks)

    • We send insurance offers to lenders for pricing. (1-2 weeks)

    • We receive and reviews terms sheets from lenders. (1-2 days)

    • We review options with agent. (1 day)

    • We provide a proposal for the agent and client. (3-4 days)

    • Client accepts offer and Stage 1 docs are ordered.


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    The process is handled in stages:

    • Stage 1

      • Formal application to carrier

      • Name the MN Trust (ILIT)

      • Name natural heirs as beneficiaries

      • Name trust protector

      • Order insurance exam

    • Stage 2

      • Trust is drafted and approved

      • Policy is issued

      • Documents signed

      • Attorney and/or CPA review and approve the transaction

    • Stage 3

      • Closing docs signed

      • Insured funds his/her trust with $100.00

      • Necessary collateral (if any) addressed

      • Policy is funded and coverage is in-force.


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    If you have questions…

    Call us today at (800) 846-3997.

    1775 Sherman Street Suite 2700 Denver CO 80203 (800) 846-3997


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