Lots of advisors aspire to work with high-net-worth clients – and for obvious reasons. But what stops many from actually doing so is a hesitation that the cases are too complex, eat up a lot of time, and perhaps they’ll get in over their head.
Simply mention the term “premium financing” and plenty of advisors will run for the hills. But before you run, maybe take a moment to have a closer look, as premium finance is a powerful estate planning tool that can be highly lucrative – and perhaps not as difficult as you think.
Premium financing is policy-funding strategy that appeals to affluent clients who need life insurance, but do not want to liquidate assets to pay for it. When financing life insurance premiums, the HNW individual borrows the money from a third-party commercial lender. The client is eventually responsible for paying back the loan with interest. However, the internal tax-free cash value growth inside the sizable life insurance policy can potentially be used to cover some or even all of these costs. Other accumulated assets, the policy’s death benefit or a combination of these asset classes can also be used to repay the loan.
The client borrows the money to pay the premiums – often upwards of $100,000 or more per year for these types of policies – and therefore doesn’t have to disturb their other investments that yield a higher ROI. Premium financing can also prevent the client from triggering capital gains taxes had they needed to liquidate assets to pay premiums upfront.
It’s not right for every client, but premium financing is still generally underutilized as a strategy for those who would benefit from it. This is primarily because many advisors are not proficient when it comes to premium financing. According to a survey of 803 financial advisors cited in Fall 2017 Forbes article, 40% said they are knowledgeable about financing life insurance, but less than 5% said they have actually completed a premium financed life insurance transaction with a client.
This amounts to a wasted opportunity to help HNW clients efficiently secure the coverage they need – and the advisor from growing his or her practice with what are inherently high-premium policies.
The good news? Help for advisors looking to expand into the premium financed life insurance market is readily available. Brokerage General Agencies (BGAs) and Independent Marketing Organizations (IMOs) who have particular expertise in case design, loan negotiations and renewals are at your disposal, available to help throughout every step of the process. Some have established relationships with multiple lenders and have direct relationships with carriers, and are also able to provide point-of-sale support.
Insurance Forums recently interviewed Eric Palmer, chief marketing officer at Fountain Hills, Ariz.-based Brokers Alliance, Inc., to get a better idea about how a BGA or IMO can assist advisors with premium finance cases.
For example, what types of client might make a good candidate for premium financing?
“The majority of insurance companies and lenders require the client to have a net worth greater than $5 million. That indicates that there is both a need for a larger, more expensive life insurance policy and also that there is likely the right asset makeup to qualify them for a loan,” Palmer said. “A high net worth client benefits because they are able to leverage their assets rather than liquidate them to pay for the needed coverage. This translates to a higher internal rate of return on their overall portfolio as well as the net death benefit proceeds to their estate.”
Palmer notes that rising interest rates should not scare advisors away from exploring premium finance opportunities. He notes that many of the interest rates today are based on a spread over one month, three months or one year LIBOR (the world’s most widely used benchmark for short-term interest rates), and that those rates have been rapidly rising in just the last couple of months.
“With LIBOR eventually going away, and an overall sentiment that rising rates will make financing hard, many advisors are shying away,” Palmer said. “In our view, however, this is a perfect time to continue to explore premium finance as a solution to fund a policy. We don’t view the success of premium finance being solely tied to rates. If the overall plan (which is long-term, not short-term) is designed and managed properly, there is still a significant advantage for the client.”
The most significant advantage to working with an experienced group on these transactions, Palmer says, is the preservation of the relationship itself. “There are a lot of moving parts with premium finance with regard to the initial transaction and each year thereafter when dealing with the renewal process. Hiccups, misrepresentations, poor sales practices, and disorganization can create tension with the agent/client relationship and potentially become costly in the future.”
For the younger HNW client, premium finance can be a very effective way to create a retirement income that is significant enough to be in line with the lifestyle and income needs someone with a high net worth would require. These designs, however, can be tricky, Palmer says.
“All too often I see case designs that would need the stars, the moon, and the sun to line up in order for them to happen. It’s unfortunate that these irresponsibly designed plans focus too heavily on making the illustrations out-perform the competition. The reality is that the story is already too good to be true … so we don’t need to over-tell it,” Palmer said.
With the proper case design, an experienced team, and point-of-sale support, a plan can be designed that is not only realistic, but can deliver on the goals you set out to achieve for the client.
The key to getting the process started is establishing the need for the appropriate coverage right from the beginning.
“If the client doesn’t understand why they need the insurance, the financing portion will only cause confusion or frustration,” Palmer says. “Premium finance is a means to fund a policy, not a sales concept to start with.”
Advisors and clients may also be concerned that it will take too long to secure the needed coverage via premium financing. Because of the high values of the policies in these cases, coverage isn’t going to happen overnight. But it doesn’t have to take much longer than obtaining more traditional fully underwritten whole life coverage, Palmer says: “The timeline is relative to the speed at which we are able to obtain all of the necessary documentation, lab results, records, etc. The more involved clients can have a financed policy in place within just a couple of months.”
Palmer adds that these policies are very lucrative for advisors in that they typically result in 6- or even 7-figure premiums due to the amount of death benefit purchased by the affluent client.
As both a BGA and an approved premium finance vendor, Palmer says Brokers Alliance typically has little to no commission split required to get the insurance in place for the client. “It’s a win-win for everyone involved.”
In addition to estate planning, premium finance can also be an important tool to help HNW clients accomplish their goals in retirement planning, charitable giving and strategic business planning.
To learn more, contact Brokers Alliance at (800) 290-7226 or www.brokersalliance.com.