Economic Challenges Open Doors For High Net Worth Client Opportunities

Any practicing doctor, dentist or lawyer will tell you that many clients today do not settle their bills promptly. Especially with regard to medical care, people will use credit or insurance, in which case payment for services rendered today may not come for months. As a result, many professionals have accounts-receivable balances that are the single largest asset of the business–yet this asset earns no interest and is non-performing.

Producers with access to such clients may be able to offer an attractive premium financing approach: use those accounts receivable as collateral for the bank loan. By doing so, these professionals gain protection immediately, while making regular payments over time, a pattern that aligns with their typical revenue stream. Since the accounts receivable are viewed as an “asset,” the bank can offer a more attractive interest rate on the loan as well.

2. The real estate owner

When foreclosures and insolvent lenders hit the headlines, clients with significant real estate holdings–apartment buildings, malls, second homes, etc.–often must look for creative solutions to their life insurance needs. These owners are particularly disinclined to liquidate when property values are depressed, even if they might have pressing life insurance needs. Yet, despite short-term devaluation, many of their properties still have tremendous value in a premium-financing scenario.

Producers can help these clients to leverage their real estate valuations appropriately to achieve attractive interest rates with the financing bank. By using equity in one or more of their properties as collateral, the client also protects against potential creditors in the event of death. This is because the bank’s lien on the real estate’s value will take priority, putting other creditors behind them in line and making settlements with these creditors more easily attained.

3. The investor/business owner

Regardless of their situation, clients want their return on current investments or other assets to outplace the interest paid on a premium-financing loan. Many successful investors pride themselves on achieving double-digit gains in spite of daunting odds, so their ability to purchase life insurance using borrowed dollars may enable them to continue to earn those returns on capital they would have otherwise spent for premiums. These clients see significant value in using leverage to achieve wealth transfer goals and obtain a higher return on their capital.

Still, when working with clients like these, producers must be prepared to make the case for premium financing in clear, direct terms. Investors may be reticent to withdraw assets from the market to fund even something as necessary as life insurance. So it is important that the producer show concrete scenarios, charts and graphs detailing how the process works and what the potential financial outcomes might be.

Bringing it all together

When you present premium-financing concepts to a client, be sure to demonstrate variations in interest rates. Rates will fluctuate over time and affect the premium financing concept’s ability to perform as illustrated, so it is important to manage your client’s expectations. Of particular importance, you must illustrate the client’s exit strategy–their ability to close out the financing–to ease concerns. Look to your life insurance carrier for the tools to create effective illustrations that help your client grasp this complex topic.

As we have noted, collateral is critical in premium financing, and meeting the lender’s collateral requirements can be challenging. There are many variations on collateral approaches, but essentially the client can adopt a traditional arrangement in which the loan is fully collateralized, or opt for a hybrid arrangement, in which the lender generally accepts less collateral but often demands a higher interest rate.

You can provide your client with any suitable general account life insurance product in a premium-financing concept. This includes both single-life and second-to-die policies. You should look for the most flexible life insurance products available so you can help your client adapt the policy–from payment schedules to investment options–over time.

With $5 million or more in net worth, clients who are eligible for premium financing are likely to have a financial planner, lawyer and accountant as trusted advisors. Producers should include these players in the planning and financing design discussions when possible to assure that they, too, understand the value of this financing concept and can integrate it into the client’s financial strategies. If you include them early, these advisors can become great allies and even sources of future business.

Your ability to guide clients through the intricacies of premium financing will strengthen your relationship with them and open avenues for future opportunities. More important, your attention to these clients–in particular to the professionals, real estate owners and investor/business owners–will help them overcome short-term challenges in order to potentially protect their net worth and pass their financial legacy on to future generations.