Archive for the ‘Letters of Explanation’ Category

Speaking to Clients About Premium Financed IUL Policies

June 16th, 2020 No comments

It’s important to understand the details and risks. This sample letter may help clients and advisors alike.


Dear Ms. Prospect:

It was good to speak with you yesterday morning about the proposed supplemental retirement plan, and I thought I would follow up with a couple of comments. As we discussed, I’m very familiar with indexed products and premium financing. I believe there are appropriate times and places to use the product and strategy, and there are times when it’s not.

Prospective consumers need to fully understand what they’re getting into on both the product and the strategy side. They need to intimately understand the variety of risks. A general rule of thumb is that they should be able to pay the full premium out of pocket but choose to finance it because they’re comfortable with the risks and have the ability to buy themselves out of trouble if trouble shows up (and it does too often). Finally, they need the policy meticulously managed until the day they die.

The proposed product is a newer policy design, and some feel it’s too aggressive. I have access to a tremendous amount of analysis regarding the policy that I’d be happy to share. One reason it’s popular in the premium financing world is because it was created to illustrate very strongly and to win the illustration wars. This doesn’t mean it’ll actually perform successfully.

As the promoter stated, it’s true that the current interest rate market makes it easier to outperform the loan rate with the life insurance policy crediting, and it may stay this way for a while. However, it likely won’t indefinitely. You’ll be signing on to significant loans over the next decade, $2.25 million, plus interest. That, in and of itself, should prove the need for some detailed analysis.

Do you understand that the loan isn’t actually gone after the 10 years? What if I told you the commercial loan was paid off after the first 10 years but it wasn’t paid off by policy values, it was paid off by taking a $3 million loan from the insurance company? And then at age 65, the projected $500,000 annual retirement stream through age 85 also wasn’t taken from policy values but was taken through loans from the insurance company? Did you realize the loan at age 85 was projected to be $32,791,478 and keeps growing to $56 million at age 95?

Regarding expenses of the policy, do you realize that of the $3.75 million in premium over 10 years, over $1.7 million is gone to fees and expenses? That’s over 45% of all the premiums and more than you’re paying out of pocket. I’m not saying that’s wrong, but that’s a bit of a hole for the policy to climb out of.

The projections are assuming a 5.67% crediting rate, and this is dictated by regulations. However, that’s the maximum allowable projection, which represents a historical average, meaning that half the time the returns would have been lower. However, your projected net cash value is growing at 11.89% from Year 11 to Year 12 of the policy. To understand how that’s possible, you need to understand the internal workings of the policy. From age 86 to age 87 the growth is 16.92% after $1.644 million in fees and expenses in that single policy year. Stress testing can be rather illuminating.

The gross cash value is projected to grow at 7.54% that year with a policy crediting rate of 5.67%. I’m not even saying this is inappropriate, I’m just saying you’d better understand it. From policy inception through age 85, there is $20 million in fees and expenses. Again, not necessarily bad, but you’d better understand what they are.

At age 85, when the loan is almost $33 million, it’s collateralized by a projected $39 million of cash value so it’s, in a sense, nonrecourse. But if the policy didn’t pan out as planned and fell off the books, and your cash value was used to pay back the loan, did you realize that you would have a $35 million taxable gain that would be phantom income taxed at ordinary rates? That means about $15 million in taxes paid out of pocket with no residual cash value available from the policy.

Do you realize there are many illustrated and projected aspects of the insurance contract that aren’t guaranteed and can be changed at the will of the insurance company? When these change (not if), the effects could be very meaningful. It might be a good idea to model the effects. By the way, this insurance company has a history of changing some of those assumptions to make more money on a book of business or to force business off the books that they don’t find profitable enough. It’s important to understand this.

Finally, for now, do you realize how extraordinarily unrealistic a projection is that assumes no variability in returns from year to year, decade after decade? It doesn’t only matter what your returns are over time, it matters when you get your returns. This is where independent modeling can be very helpful.

The internal rate of return (IRR) on your out-of-pocket cash flow to net policy value in Year 10 is negative 2.34% but is positive 4.78% by Year 15. That’s quite a swing in a handful of years. By age 85, you’ll have experienced an average annual rate of return of 9.685%. That’s pretty attractive, especially when you consider 45% of the premium went to expenses and the proposal illustrates $20 million in total expenses through age 85. Even the IRR on gross premium, including what you borrowed, is 5.82% over the same time period. When given the expenses noted above and a gross policy crediting rate of 5.67%, like I keep saying, you’d better understand how that works.

My understanding is that this has been postured as a relatively low risk endeavor in which wealthy and sophisticated people take advantage of leverage. Leverage is perfectly fine, and most of us find ourselves doing this, most notably when buying a home. However, the old axiom, if it’s too good to be true … should be infiltrating your thoughts. I’m not sure there’s such a thing as a tax free 10% rate of return that is low risk.  I believe you need help understanding the true risk of this proposal. And recall what I mentioned about commitment; you can’t bail on this for years without taking some big lumps.

If you committed $150,000 a year to a traditional investment and realized a reasonable rate of return, you could have over $2 million in 10 years. If you realized a 0% return, you’d still have the $1.5 million. With your financed insurance proposal, even if the very attractive assumptions panned out, in 10 years, you’ll still be underwater relative to your contributions and if the assumptions don’t pan out, you could have nothing and lose posted collateral over and above the out-of-pocket premiums you paid.

Additionally, if the deal is working out fine but you have a life change and can’t, or choose not to, continue contributing to the program, don’t assume you have that option without taking a hit.

As I mentioned during our phone call, I’m not against indexed universal life or premium financing, but my history in the market of analyzing proposals and existing programs as well as my experience in the litigation support and expert witness world leads me to understand that an abundance of caution is beneficial and the fees I related are quite minor relative to what’s at stake and the potential consequences. Remember, I’ve been through the looking glass. It’s what I do.

Bill Boersma

Bill Boersma is a CLU, AEP and LIC. More information can be found at,, or email at

Letters of Explanation: IUL Premium Financing Risk

June 17th, 2019 No comments

Dear Mrs. Client:

Last week I promised you some numbers to put into perspective my thoughts that premium financed Indexed Universal Life isn’t what you think it might be.

The spreadsheet you showed me some time ago assumes an annual loan of $700,000 for 13 years.  This is used to purchase a policy that assumed roughly a 7% annual crediting.  This may sound conservative for an S&P 500 Index return but it isn’t if you understand how Index funds work.  A significant issue is that the dividends aren’t included in the return and historically dividends make up at least a couple hundred basis points of the return and sometime 500 basis points.  There are entire decades where the dividends are greater than 50% of the return of the S&P 500.

For full post, click here…

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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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Letters Of Explanation – Policy Funding Options

September 24th, 2018 No comments

Dear Mr. Client:

It was a pleasure to speak with you last week and I appreciate the opportunity to review your life insurance policy. Per our discussion, this note is intended to be a follow up summary of our conversation. If there is any additional information you were looking for which I have forgotten to include, or if you have questions about what I have written, please do not hesitate to get back with me.

Your $1,000,000 was originally an Alexander Hamilton policy which was acquired by Jefferson Pilot and subsequently merged with Lincoln Financial. Though I do not have the original sales ledgers, the original premium of $13,750 was likely calculated to maintain the policy indefinitely given the interest crediting and expenses assumption in play at the time the policy was issued in 1995.

Since that time interest rates have come down significantly; probably 300 basis points or more. For full post, click here…

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Letters of Explanation: Donating a Policy to Charity

August 16th, 2018 No comments

Good Afternoon:

It is my pleasure to be introduced to you.  Your accountant referred you to me because of the frustrating, yet required process when donating a life insurance policy to a non-profit.  I understand it is not pleasant to hear you won’t be getting the deduction you were expecting for your policy donation to the school but the process I will bring you through will get you everything you are entitled to.

Unfortunately, your cash value is not the number the IRS looks at when taking donations into account.  To think about it in a simplistic way, they aren’t eager to let you take a deduction for something you have never paid tax on.  In other words, the special rules which allow your life insurance cash value to grow tax free is what is preventing you from fully deducting that same cash value. For full post, click here…

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Letters of Explanation – Trustee Liability

July 31st, 2018 No comments

This letter is to the management of a law firm.  Multiple attorneys act as trustees for clients.  There has been no program of management regarding these policies and I was called in to suggest a plan.  I was also able to look at redacted policy information and could see at a glance that many policies are underperforming and headed towards failure.  A decision was made that the attorneys deal with it on a case by case basis as they see fit.  I see this as a grave mistake.

Dear Firm Management:

It’s been a while since we’ve talked and the last time we did you mentioned the attorneys who are acting as trustees will be deciding independently on how to proceed.

I understand this but as we discussed earlier, if things go wrong (which they have and will) and result in a lawsuit, case law has shown that an independent third party is critical to a successful defense.  I am currently involved in four litigation support and expert witness cases, some going after trustees and some defending trustees. For full post, click here…

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Letters of Explanation: Whole Life Term Blend

July 25th, 2018 No comments

This letter is to a client explaining why the term blended whole life policy on his mother is failing:

Dear Mr. Client:

Unfortunately I still do not have what I requested from XYZ Life but I was able to do some work anyway.  Also, what I requested may end up being sent directly to the policy owner, which is you as trustee, at the address of record.

You had asked about potential income tax consequences regarding this policy and I believe there would be none as it looks like the gross cash value is less than what I calculate the basis to be in the contract.  I am waiting on a formal basis and gain calc from the company. For full post, click here…

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