Vetting a Premium Finance Deal

February 25th, 2019 No comments

A family office called me in to review and analyze a proposed premium finance deal. After gathering the details of what the family was trying to accomplish and requesting presentation materials, insurance ledgers and financing term sheets, I dove into it.

The advisors let me know that one of the primary things they wanted to understand was what their “bail out” option would be in 10 years. In other words, they wanted to understand their options in a worst case scenario, which is an important thing to get one’s arms around.

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This plan was built around a 10 pay whole life contract and the collateral for the policy was to be an existing whole life contract on the same individual, the matriarch of the family. A part of my analysis was a historic comparison of whole life dividend, and how they move in relation to the interest rate markets, to LIBOR rates. An important and revealing aspect of this for the advisors was how the policy dividends really work and how they are applied.

What I discovered through the process was that the advisors were significantly misinformed about the inherent workings of a traditional whole life contract in a couple of different ways. This is very important because the premise of the deal was to make hay on the spread between the crediting rate of the policy and the loan rate for funds to pay the premiums. The deal was postured to appear that there was a spread when, in fact, no such spread existed.

In the presentation materials the loan rate was assumed to be very low at less than 4% and the dividend of the policy was shown to be 6.4%, which was actually true. There are a couple things that make these numbers not real. First, the loan rate would assuredly increase over time and this was not accurately accounted for and the dividend rate of the policy is not the same as the effective growth rate of the policy cash value.

How can the growth rate for the policy and the declared dividend rate of the policy not be the same? The answer is: Expenses. While the dividend rate is actually credited to the cash value, after all of the expenses, including commissions, overhead costs, mortality charges, policy fees, state taxes, etc, are deducted, the actual internal rate (IRR) of return on the premiums to cash value are only about half the declared dividend rate at the proposed point of roll out. At the 10 year point the IRR on premium to cash value was only a fraction of one percent, this after eight figures of premiums was poured into the contract.

What we have is reverse arbitrage, which I am sure no-one entering the contract was looking for. When the loan rate is, in realty, greater than the growth rate of the cash value, clearly the cash value cannot grow in excess of the loan in order to pay it back some day.

The bottom line is that the deal was going to be underwater from day one and continue to sink every day moving forward. When I evaluated the bail out option in year 10, not only would the new $20,000,000 policy be lost, if the collateralized cash value was used to pay back the loan, even the existing life insurance would be lost.

This was an absolute dumpster fire, a train wreck, an abomination of a financial shell game. But we caught it and moved on.

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Is Association Term Insurance Really a Good Deal?

February 20th, 2019 No comments

Young professionals don’t stay young forever.

If your client is in his 20s and is a young lawyer, accountant, doctor or member of any association, he’s no doubt been offered the opportunity to purchase inexpensive term insurance through his association. He gets all the benefits of easy enrollment and no lengthy forms nor medical questionnaires to complete. He may not even have to pay a bill as everything might be done electronically through his payroll department. Then, to top it all off, he receives a dividend/refund check making the price even lower. He’s convinced association term life insurance is the best and only way he should ever buy term insurance for his family—after all, the members of his profession are clearly a better risk than the public at large. The only problem is those automatic five-year increases become very expensive once he hits age 40.

For full post, click here…

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Testing and Modeling Life Insurance by Bill Boersma & Marty Shenkman

February 12th, 2019 No comments

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Life Insurance Reviews Don’t Always End in Disappointment

February 7th, 2019 No comments

Just as with routine physicals, a “well visit” can identify opportunity.

Sometimes I think my job is basically giving people bad news. As a consultant, yes, I see more than my fair share of sick policies just as the number of patients that come through a doctor’s office in the course of a day who are sick is likely greater than the population at large. Sick people congregate at the doctor’s office and sick policies congregate on my desk.

The main issue with educating the advisor market on sending sick policies to me is that they don’t always send policies to me that aren’t obviously sick. Often times, sick policies don’t look sick and when one waits long enough to see the sick, they’re terminal. Hey, just like with people.   For full post, click here…

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What kind of life insurance should I buy? – by Bill Boersma & Marty Shenkman

January 22nd, 2019 No comments

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Life Insurance Survey by Bill Boersma & Henry Montag

January 8th, 2019 No comments

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When Is Whole Life Not Really Whole Life?

January 7th, 2019 No comments

Whole life insurance has been held up as somewhat holy and unaffected by the travails of universal life insurance. This has got to stop.

Over the years, there’ve been innumerable pieces written on the failings of universal life insurance. However, if consumers paid attention when these products were explained to them, they’d be no more surprised by this when discovering their retirement plans weren’t going to pan out when they experienced only half the expected market return. None of this should be a surprise; if projections aren’t realized, results will differ.

That being said, there’s little discussion about the failings of whole life insurance. Now, when I say WL, I mean actual WL and not just permanent cash value life insurance. Somehow, WL has been held up as somewhat holy and unaffected by the travails of UL. This has got to stop because many policyowners and their policies are suffering for it. For full post, click here…

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Giving Life Insurance to Charity by Bill Boersma & Marty Shenkman

January 2nd, 2019 No comments

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Letter of Explanation – Premium Financing

December 20th, 2018 No comments

Following is an email I recently received:

Over this past year I have been contacted several times (by parties that I respect) asking me to get involved with Premium Financing…    The pitch is compelling – that Indexed life insurance is great (a game changer); that some carriers offer immediate surrender free CV of 100% of the premium deposit(s); that super large banks are happy to do the lending…   on and on…

I just read your take on this and I respect your opinion…     Could I ask you, if I was to get involved, what insurance companies or financial firms do you think are respectable and experienced (and doing the best job) in this specialized arena? For full post, click here…

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Saving Money on Life Insurance – Part 3

December 19th, 2018 No comments

The real-life effects of premium funding differences.

Trying to save money on life insurance may not be a good idea (as discussed in Parts 1 and 2 of this series).

The underlying expense structure and chances of a policy having a life expectancy longer than the insured individual is often determined by how much goes into the contract. Why not go a step further? What about evaluating a life insurance transaction like any other investment opportunity? For full post, click here…

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