Over the last 6 months, a colleague and I took on a difficult task concerning an in-force premium finance review. The case was done through another advisor with an outside premium finance vendor and since things got a little messy, the client sought fiduciary council with one of our top advisors so they could figure out what went wrong and how to move forward.

The premium finance plan was placed in 2014 and based on the projections from 9 years ago, this plan was a slam dunk and no brainer for the client to move forward with. After all, the borrowing costs from the bank were projected to stay at 2.20% forever and the indexed returns were projected at 6.5% consistently. An easy 4% spread between the indexed returns and borrowing rates.

Fast forward to today, the client was over 7 figures underwater in this transaction. Meaning the primary collateral source (IUL cash surrender value) was over a million dollars less than the bank loan. Essentially, the client was posting a huge amount of outside gap collateral in the form of outside investments to make the bank whole. Not only was he in a large hole after only 9 years in the transaction, but it was projected to get even worse.

Without any additional funding or face amount reductions, the IUL policy was projected to lapse at age 84 based on current projections while still owing $9.5m to the bank on the financed loan, assuming a 4% borrowing rate.

There were many problems with not only the transaction itself but also with the policy and policy management. For instance, the original design was presented under a best-case scenario with minimal client out-of-pocket contributions and an excessive amount of leverage. A higher cost IUL was used with a minimal term blend, creating a higher fee drag for the policy to hurdle in addition to the borrowing costs.

During the transaction the advisor missed one of the premiums, meaning the policy was never maximum funded, which increased the COI’s as the net amount at risk wasn’t reduced as expected with a typical max funded level death benefit IUL. Additionally, the advisor also tried to ‘time the market’ by switching in and out of the indexed account to the fixed account, often missing potential years of hitting the cap.

Lastly, the renewal rates offered by the insurance company were subpar in comparison to the industry with only a 7.5% S&P cap at renewal. To make matters worse, borrowing costs ratcheted up significantly with the drastic climb of the Federal Funds rate. Moving forward, the chances of arbitrage were minimal considering the lower cap, the higher borrowing costs, and the higher fee drag due to the non-maximum funded design. Clearly, this policy was in dire need of an extensive review of all his options, which we carried out through dozens of iterations wither multiple variables and stress tests.

Luckily, we found a creative solution for the client to stop the bleeding and responsibly exit the transaction, all while still providing low-cost life insurance coverage for estate planning.

While this was an extremely difficult, time-consuming case, it was also one of most rewarding of my career. The client stated he had met with a handful of other advisors over the last few years and was disappointed after most proposed solutions involved a policy replacement and more leverage. He received more clarity in a few months in working with our advisor and the LifePro team, than he did at any point in this almost decade long transaction.

The point of this isn’t to claim victory or to stand on our moral high ground. Instead, it is to learn from the mistakes of others so future clients aren’t put into this same situation. Premium finance can be an effective tool to build and transfer wealth. However, it must be done the right way for the right person.

Additionally, programs with less leverage, extensive stress testing, and no additional outside gap collateral may be a more appropriate way to help our clients reach their financial goals. They are also stickier, meaning clients see the value and stick with the plan instead of prematurely exiting. Meanwhile, the program our advisors have been using is an innovative and high-quality leader in the insurance industry. With one of the highest persistency rates compared to both financed and non-financed life insurance policies, they have managed to secure over $5 billion in loans since their start in 2000. We have been advocating for more conservative, Hybrid Financing solutions since the beginning and continue to use industry leading programs, such as Kai-Zen, for the long term success of our clients.

Below are a few of the key metrics we collected during our extensive policy review process:

Bank Loan Balance:

• 2023 Projected: $2,850,000
• 2023 Actual: $3,059,219

IUL Cash Value:

• 2023 Projected: $3,277,573
• 2023 Actual: $2,024,015

Outside Gap Collateral:

• 2023 Projected: $0 with $427,573 of Equity
• 2023 Actual: -$1,035,204

Indexed Returns:

• 2023 Projected: 6.50%
• 2023 Actual: 3.53%

Lender Borrowing Rates:

• 2023 Projected: 2.20%
• 2023 Actual: 6.49%

Lender Renewal Interest Cost:

• 2023 Projected: $63,671
• 2023 Actual: $105,410.53

Contact LifePro Today!

If you are looking for a partner who cares about your clients as much as you do, please reach out to LifePro Financial Services at 888-543-3776. We are a premier IMO located in San Diego, CA that has been in business since 1986 and was originally founded by Bill Zimmerman.

Our focus is getting advisors in front of the right prospects through our proprietary digital marketing systems while offering industry best-case design and reporting, professional back-office support, and competitive compensation with incentives.

This material is intended for educational purposes only and is not intended to serve as the basis for any purchasing decision. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. The hypothetical example is shown for illustrative purposes only and is not guaranteed. The characters in this example are fictional only. Your actual experience will vary. Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse or affect any guarantees against lapse. Remember to consider your client's individual circumstances and objectives when discussing their specific situation. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of the unrecovered cost basis will be subject to ordinary income tax. Withdrawals are generally income tax-free unless the withdrawal amount exceeds the amount of premium paid. Tax laws are subject to change. Clients should consult their tax professionals. Investment advisory and financial planning services are offered through LifePro Asset Management, an SEC Registered Investment Advisor. Registration does not imply a certain level of skill or training. Investments involve risk.