“Always in motion the future is.” Master Yoda
Life insurance continues to see strong activity as we weather the ongoing pandemic. The higher mortality experience has motivated many people to put their life insurance protection plans in place.
Qualified customers may seek a leveraged solution to fund their life coverage. It is always prudent to stress designs to help put together plans that have a high probability of success over a wide range of conditions.
- Record inflation impacts everyone and can have a devastating impact on retirement and family protection plans. Inflation surged to 7% in December, 2021 – the highest in 4 decades.
- Rising interest rates as the Fed has communicated the intent to raise rates three or more times in 2022 in an effort to combat inflation. The potential impact of a higher cost of capital needs to be evaluated for all leveraged plans.
- Income and estate taxes may be higher in the future. According to a published IRS report, high income earners saw their income taxes rise in recent years.
- COVID-19 Pandemic may not be going away anytime soon. A life insurance carrier recently reported seeing a 40% increase in mortality experience in 16 to 64 year olds as compared to pre-pandemic experience. Life insurance products are priced very carefully and variances from expectations can lead to product and pricing changes.
Premium Financing has been going strong over the past three decades and has worked successfully for customers over a wide range of loan rates. Successful plans tend to have a couple of things in common. Chiefly, monitoring plan performance and stressed design that handle a wide range of economic conditions.
Leveraged Life Insurance Planning Tips for Challenging Times
- Cut interest costs with a demand deposit account (DDA). GFD’s has reduced interest rates on premium financing loans when a demand deposit account is used as collateral. Since the premium financing loan pays annual premiums, you can also deposit unused loan funds into the DDA account.
- Avoid pledging collateral that’s exposed to value fluctuations. Using assets or a securities portfolio subject to market volatility as collateral may require the client to post additional assets making it even more critical that you avoid pledging assets likely to have discounts at valuation or those that are exposed to market volatility.
- Devise a proper exit strategy which can act as a safety net to manage or repay a loan. There are many ways to exit a premium finance loan, including exiting with policy cash values, death benefit, GRATs, cash from a liquidity event, etc. Ultimately, you need to make sure the exit strategy is attainable and that it suits the borrower’s life expectancy, repayment timeline, and doesn’t interfere with their future income needs.
- Stress testing is more critical than ever for the design process. Always start with a sound foundation of reasonable assumptions for any premium finance modeling and then stress those assumptions to understand potential interest and collateral exposure with a design. Unreasonable assumptions and lack of stress testing are probably the top two reasons why a premium finance design fails.
- Service after the sale is critical to proper premium finance case management. Actual experience is going to vary from the original “as sold” illustration. Review of the life contract performance, loan interest rate changes, and changes to the client’s financial situation on at least an annual basis will help ensure any needed changes are implemented in a timely manner to keep a design on track.
For more on premium financing and why it’s a smart wealth management tool, contact us at Global Financial Distributors.
