Life Premium Finance

C. Lee Boutt has worked in finances for many decades. He knows the ropes and the system and in 1992 he established Boutt Insurance Services, Inc. In April 2009 he attended Gradient Insurance Brokerage's School of Premium Finance where he met Phil Vogel, the school's teacher. In August, Lee returned to the school and created a bond with Mr. Vogel and the two decided to form a team. Now with a great team on his side, Lee is ready to give you the best financial advice in the nation.

 

 

Phil Vogel, one of the top financial planners, has joined our team to better serve you and your financial needs. Phil has dedicated over two decades to the financial services industry and held multiple leadership roles in the agency system. In 1998, he founded Vogel Financial Services, LLC into a comprehensive financial services business which include business and high net-worth clients along with consulting services for independent producers throughout the Midwest.

 

 Life Premium Finance Brochure

 


Article from September 2009 CPA Journal:

Premium Financing
The Time is Now

By Cory Chmelka

As Ben Franklin observed, death and taxes are life's only certainties.

Nevertheless, there may be a better way for high-net-worth individuals who need substantial life insurance to cover those inevitable estate taxes while paying for that protection. Rather than use current cash flow
or liquidate appreciated investments that may come at a high tax cost, premium financing - whereby one borrows money from a bank or other lender to purchase insurance - is often the most efficient and cost-effective way to pay for life insurance. The discussion below focuses on traditional premium financing for the purposes of estate planning, not investororiginated life insurance (IOLI) or strangeroriginated Ufe insurance (STOLI).

Premium financing has received attention in recent years, and the strategy has extraordinary appeal in today's market environment. The combination of low interest rates and an uncertain market makes now an ideal time to consider premium financing. Particularly when one's net worth is significantly tied up in real estate that has depreciated in value, financing avoids making an unprofitable sale to cover the premium. If the market tightens further, cash-flow issues may become an increasing concern, making premium financing an even more attractive alternative.

When is premium financing appropriate? Generally, this author employs premium financing with high-net-worth ($5 million or more) clients. Notably, these life insurance policies are almost always owned by irrevocable trusts to keep the policy's death benefit out of the owner/insured' s estate. When using a premium financing strategy, clients are making smaller gifts to the trust This enables them to retain greater flexibility with other gifting strategies and potentially reduce gift and estate taxes.

Typically, to get clients interested in premium financing, many advisors present sophisticated analytics illustrating the potential benefits if the cash value of the life insurance policy grows at a greater rate than what the client is paying on her loan. Further, these advisors might project additional earnings that money not spent on insurance premiums - but rather, invested in another investment account - might generate. While all that growth can be impressive, those analyses miss the point: Once the decision to purchase ufe insurance has been made, financing the premiums saves money.

Greater Potential Savings

Consider this example: A married couple, aged 60 and 54 with a net worth of $50 million, decide to purchase a secondto-die universal life insurance policy with a death benefit of $25 million. If they pay the premium on an annual basis over their 30-year life expectancy, the coverage would cost them $188,000 annually. Alternatively, they could borrow the $1.4 million at 4.5%, pay the insurance company now, and pay $65,000 in interest to the lender for each of the 30 years. (Note that the $1.4 million borrowed includes the cost of a return-of-premium rider that increases the death benefit, so that when the policyholder dies, the bank loan can be paid, and the client's trust would net $25 million tax free.)

Even if the clients earn no return at all on their annual $123,000 savings (the difference between $188,000 and $65,000 spent on insurance), they would accumulate a little more than $1.2 million after 10 years, roughly $2.5 million after 20 years, and more than $3.7 million after 30 years. Of course, if they decide to invest the money and save in a side account that earns 4% annually (negative arbitrage) slightly less than the 4.5% interest rate they would have an extra $6.8 million at the end of 30 years, in addition to the $25 million death benefit. While it's also possible that the side investment account could underperfoim, the $3.7 million saved after 30 years provides a cushion more than capable of absorbing a year or two of poor market performance, so there's still solid potential for additional growth.

Focusing solely on the money saved - not what the savings might earn - enables a client to more readily embrace the premium financing option. This strategy takes factors such as rising interest rates and variable returns out of the equation and stresses a certainty: $3.7 million will be saved after 30 years. Then, rather man discuss uncontrollable variables, the advisor can focus attention more appropriately and productively on policy design and risk management.

Loan for Life

The term for the premium financing loan is another issue that many advisors fail to address adequately. While lenders offer loans that run for five, 10, or 15 years, there are great benefits to using a loan for life. Just as life insurance matures at the death of the insured, so does the loan. What happens if one chooses the most common 10-year term and, in the 1 1th year, the lender doesn't renew the loan? If the loan defaults, it falls back to the guarantor of the loan - ultimately the client. This may unnecessarily trigger a gift tax.

An advisor can also spend time managing the coUateralization of a client's loan using bonds, stocks, and, to a lesser extent, real estate. In some cases, a client will pledge a bond portfolio. Because the client can still receive the income from the portfolio to meet living expenses, this works well for many retired individuals.

If stocks are used as collateral, clients should understand that most premium financing arrangements permit trades and reallocation, so they can make changes in their account as long as they don't liquidate the account without the lender's approval. The lender reviews the accounts monthly, and, if the risk position changes, they reserve the right to ask the client to post more collateral to cover the risk potential. Naturally, because collateral is posted to support potential gaps between the policy's cash value and the loan amount, if the pledged securities portfolio suffers serious market losses, the client may be required to add assets to that account. Of course, conversely, as the insurance policy's cash value grows over time, at some point, collateral may no longer be needed.

Why Now?

In today's low-interest-rate environment, a premium financing strategy may be especially attractive for many individuals. There is no certainty, however, that interest rates will remain low as long as the plan is in effect. What happens if interest rates skyrocket to 10%? Again, remember that the $3.7 million cushion of money is saved over the course of 30 years. Even with a few years of high interest rates, the client would still come out ahead.

A premium financing program should allow one to repay the loan at any point without prepayment penalties. Advisors also should look for lenders that have no origination fees or commissions on the loan.

Above all, financial advisors should pay attention to a lender's experience and the insurance company's reputation. Ideally, a client should borrow from a lender whose core business is premium financing and that has been writing loans for a considerable number of years, rather than someone new to the market. The lender should have me experience and endorsement of insurance carriers. Because the death benefit of a multimillion-dollar policy likely will not be payable for many years, it is vital to purchase the policy from a highly rated and established insurance company. Because the guarantees on life insurance are only as good as the company issuing the policy, an advisor should deal only with the highest-rated insurance companies.

Premium financing, when utilized by qualified clients, not only saves cash flow but also increases internal rates of returns. Today, low interest rates, new options for policy design and risk management, and lenders with significant experience in premium financing make this an ideal time to consider this straightforward strategy.

Cory Chmelka, CFP, is a managing partner with Capstone Wealth Management, LLC, in New York, N.Y.

Link to this article:
http://www.cpajournal.com

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