Selling insurance products can be difficult during good times and extremely challenging in recessionary times. In fact, recent industry studies revealed the current economy has taken a toll on the life insurance industry. The average case size has decreased. In addition, universal life sales (as a whole) have seen a large decline.
One market hit hard is the affluent. Few wealthy clients are now willing to write a big check for life insurance. Instead, they are holding liquid assets until more certainty with the economy occurs. For those affluent clients who understand the value of getting life insurance today–while they are insurable and rates are lower–many are turning to term instead of permanent life insurance.
Term insurance is better than completely foregoing coverage. Yet for many wealthy individuals, permanent coverage may be a better option to meet their needs. As an industry, we can become more innovative by helping our clients find ways to get the necessary permanent coverage. Now is the time to convey to affluent clients that permanent coverage could be their best option.
One option explored by producers for funding life insurance is premium financing. Generally, the technique is viewed and illustrated as a long-term solution for clients who lack liquidity. Most premium financing illustrations show loans of 10 years or more. These long-term illustrations usually cite death as a loan repayment strategy. This concept works on occasion, but the closing ratios are typically low for these cases.
To make things more difficult, many lenders have exited the premium financing market due to scarcity of capital. Remaining lenders have raised their lending rates and net worth requirements. However, that doesn’t mean you should forget about premium financing. It just means changing how you think about it. For instance, a concept that is rarely explored but still very viable is short-term premium financing. This strategy allows clients to retain their cash and liquid assets, while offering them the permanent coverage they need. The strategy has advantages and disadvantages (see chart).
Not a STOLI scheme
Legitimate short-term premium financing should not be confused with stranger-originated life insurance or STOLI, which calls for the client to pay off the note by transferring the policy to the lender. Legitimate short-term financing programs are done through banks and other lending institutions.
These institutions are in the business of lending money and being repaid in cash. They do not require life expectancy underwriting nor do they impose minimum age requirements. Full collateralization is required, often using cash or cash equivalents, along with the cash surrender value of the policy. The client’s objective is to purchase a policy to meet long-term planning needs. Let’s look at a recent case that used this strategy.
Real-life case study
At age 58, Michael T. has a net worth of $12 million. A year ago, Michael’s net worth was closer to $17 million. He owns a successful construction company in a Colorado resort community. In addition, Michael owns numerous commercial and residential rental properties in the western part of Colorado, a region where the gas and oil industry has been booming.
The economy has slowed. As a result, Michael’s construction business has come to a near standstill. Fortunately, his rentals continue to do well. Michael has accumulated nearly $2 million in cash and certificates of deposit. He is using this liquidity, plus the rental income, to keep his business as strong as possible. He wants to be ready to expand quickly once the economy improves. Michael’s three children assist in his construction business and the management of his rental properties. However, Michael owns 100% of all his businesses.
Michael’s insurance advisor and his estate planning attorney both advise him to continue planning while his business value is down. Michael is open to their ideas. Yet he is insistent that his liquidity be maintained. Michael is leaning toward purchasing term instead of the permanent insurance his advisors are recommending.
While Michael’s purchase of term insurance does provide the life insurance producer with a sale today, it also requires the producer to later “resell” the value of a permanent policy. A term sale also doesn’t take into consideration other planning opportunities available to Michael.
As an alternative, his insurance advisor recommends that Michael look at a short-term (3-year) financing proposal. This proposal allows Michael to retain his cash and acquire a permanent universal life policy with a no-lapse guarantee.
A 10-year term premium for $5 million of coverage on Michael would be $42,000 per year or $126,000 for three years. The permanent UL policy with a no-lapse guarantee is $85,000 per year or $255,000 for three years.
Through a short-term loan with a fixed interest rate of 5.5%, Michael will be able to acquire the permanent policy for an upfront cost of $7,500 (loan origination and setup fees.) His annual loan interest payments would be $4,675, $9,350 and $14,025 for a total 3-year cost of $35,550, which is less than one term premium. Separately, Michael will create a series of grantor retained annuity trusts (GRATs) using his construction business ownership interests. He also will begin a gifting program into an irrevocable life insurance trust (ILIT).
At the end of the loan term, Michael has options regarding repayment. He can make a direct gift to the ILIT equal to the amount of the loan. Michael also can make a personal loan to the ILIT or he can use the GRAT remainder that is now in the ILIT. Michael also could use a combination of the three options. In addition, he has the liquidity of the sinking fund within the ILIT that was created through the gifting program.
After considering all of his options, Michael chose the permanent insurance plan with short-term financing. Michael used his local bank where he regularly does business. He liked the flexibility provided by the plan. In addition, Michael’s strategy took into account the decreased value of his business created by the current economy. This allowed him to implement his estate strategies at a discounted value. As a result, Michael felt he made smart decisions in his short and long-term planning.
It’s safe to say, not many people find pleasure in writing big checks for insurance premiums. That’s why it takes time, thought and preparation to sell permanent coverage to wealthy clients.
Don’t let a tough economy stand in your way of selling to the affluent market. Rather, use a down economy as a motivator for closing those large sales. Offering wealthy clients a short-term financing plan may just be the solution they are searching for to meet their evolving needs.
Chuck Van Devander, JD, LL.M, CLU, ChFC, is senior vice president of distribution services at Aviva USA, Des Moines Iowa. You may e-mail him at [email protected].