Why would someone want to utilize a premium financing strategy? Premium financing is typically most beneficial to high-net-worth individuals or business owners. Premium Financing allows these people to obtain life insurance with a large face amount and higher cash value without dramatically impacting their cash flow and/or liquidating investments to pay for it.
Premiums for a high face amount can cost hundreds of thousands of dollars a year. While the client may be worth significantly more than that, they may not have enough liquid capital available to pay such high premiums and may not be willing to liquidate assets to raise the necessary capital. Premium financing allows them to attain sufficient insurance while keeping their assets intact.
Many high-net-worth individuals need life insurance to address legacy planning, business continuation, and tax issues. However, many of these individuals may find themselves in a cash-flow deficit while they still need liquid funds for other purposes and investments. For high-net-worth individuals to continue to grow and protect their wealth, they need to take advantage of leverage.
By taking advantage of the low cost of capital, they can optimize their own cash flow while securing the life insurance they need for their family and/or business.
Complications with Premium Financing
You may be wondering: “That sounds great! So, what’s the catch?” The main push-back that many individuals have with premium financing is the additional collateral and complicated nature of this type of strategy.
Premium financing involves the lending of funds to a person, company, or trust to pay an insurance premium. Premium finance loans are often provided by a third party, typically a bank, at a certain interest rate. The borrower will be required to pay the interest on an annual basis.
In addition to the interest payments, the borrower will need to put up collateral. The first asset put up for collateral will be the insurance policy. In the early years, the policy values are usually less than the outstanding loan balance. The shortfall is made up with outside assets. This collateral requirement can also be met with a letter of credit from another financial institution.
There Must be a Better Way
As I mentioned before, people are weary of having to put up additional collateral and don’t want to deal the complications of setting up and carrying out a traditional premium financing strategy.
That’s why Advisor’s Resource Company has created a proprietary turn-key premium financing strategy called R-Squared. R-Squared is structured so that the financial commitment is much lower than traditional financing programs. This is because R-Squared utilizes a trust structure to pool multiple premium financing loans together. At the same time, it addresses the previously mentioned issues by offering:
No Additional Collateral
Traditional premium financing arrangements typically have an additional collateral requirement. R-Squared is designed to have NO additional collateral, meaning that individuals are only risking the money they have paid personally.
R-Squared is designed around our experience in the life insurance business. We understand clients sometimes change their mind or need their funds in other areas of their life or business. Therefore, we have designed R-Squared to be flexible. If a client decides they no longer want to participate in the program or cannot make a payment. The trustee will pay off the client’s premium financing loan using the surrender values from the policy and distribute the policy back to the client. This will leave the client with their policy and the remaining cash values. This gives clients more flexibility and options should their situation change.
Get all the Details
Want to learn how R-Squared is different than traditional premium financing? Check out our overview of this strategy: