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Archive for October, 2019

Introduction to Premium Financing by Bill Boersma

October 29th, 2019 No comments

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Success Story: Life Insurance Loan Refinancing

October 14th, 2019 No comments

A gentleman has a $2,000,000 mutual whole life policy with an $800,000 loan.  He and his wife weren’t even aware of the loan until recently because his agent wasn’t helping manage the policy and the trustee didn’t understand what was going on.

Since he didn’t realize there was a loan he wasn’t paying loan interest so it has been accumulating.  Additionally, his agent told him years ago he didn’t have to pay the premium out of pocket and that the policy values would pay it for him.  This turned out not to be true and his policy is in danger of collapsing with over $900,000 of gain at ordinary income tax rates.

The policy premium of $25,000/yr is being added to the loan annually while $56,000 of dividends are buying additional insurance (paid-up additions or PUAs).  We changed the dividend option to pay the premium so the loan wouldn’t keep growing.  Since the loan has an interest rate of 8%, this left $64,000 of loan interest of which $31,000 could be paid by the remaining dividends.  But who would accept an 8% loan?  Most insurance policy owners, that’s who.  They would refinance an 8% home mortgage but they don’t realize they can refinance a ridiculous policy loan and no usually one tells them.

We ended up refinancing the loan for 3.75%, collateralized by the policy itself, that reduced interest to $30,000, saving him $34,000 in interest annually.  This was enough to pay the interest on the new loan with a little bit left over to start paying down the loan.  As the policy dividends grow the loan principal can be paid down more.

The policy is now performing better than it was, has a full $2,000,000 tax free death benefit, has a much lower debt service and hundreds of thousands of taxes have been avoided.  It almost seems too good to be true but it is because someone paid attention.

 

 

Do you have a client with a policy loan?  It might be a good idea to talk.

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Whole Life Dividend Options and Policy Management

October 9th, 2019 No comments

Manage policies in your clients’ best interests.

Even though whole life (WL) insurance is one of the most traditional forms of life insurance, there’s an abundance of misunderstanding regarding how it works and the available dividend options. For the purposes of this piece, I’m referring to actual WL, not just permanent, cash value life insurance that many consumers generically refer to as WL. Universal life, indexed universal life, variable universal life and guaranteed universal life aren’t to be confused with WL.

Additionally, I’ll be referring to classic dividend paying WL, often referred to as “participating (par)” WL. It’s important to understand WL dividend options so you can make sure the policy is managed in the client’s best interest. Because I see so many problem policies, I understand why they’ve become problems; lack of understanding and lack of management. For full post, click here…

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Life Insurance: Told vs. Sold: Part 3

October 2nd, 2019 No comments

What policyowners are actually buying isn’t always necessarily what they think.

Part 2 of this series dug a bit deeper into the details of whole life and premium financing as it pertains to what policyowners are presented and what’s reality.

After highlighting the facts and figures that show this doesn’t really work as presented, I get the response “But Bill, that’s why we have the client pay loan interest out of pocket. It makes the program more conservative.” Frankly, that’s true, but how does that help relative to the misrepresentations I regularly see? All it does, it makes the policy look like it’s working on arbitrage, allow it to pay its loan off and keeps the collateral requirements lower. It doesn’t actually change the important dynamics of the transaction. If you add a couple hundred bucks to your mortgage payment every month, it’ll be paid off earlier, but it doesn’t change the deal. Putting more money down on a real estate transaction doesn’t improve the return on the property. The return is the return. Extra money down may make it less risky, but it absolutely doesn’t change the return. For full post, click here…

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