Adam Reyna

Please take a few minutes to go on a quick journey with me. I want you to think back to the first vehicle you owned. For many, that was one of the best times of their life. You were a young 16-year-old with the whole world in front of you. Times were simple. Even though your first vehicle was a gas-guzzling stick shift with windows you had to roll down by hand, and the glove box only opened when you smacked it just right, you loved that car. That car was the best thing to happen to you.

Back then, we did not know what future technology our world had in store for us. We were just happy to be on four wheels.

Fast forward to today.

Now you are behind the wheel of your brand new, top-of-the-line electric car that looks like a spaceship, is charged by your solar-powered home, everything functions on voice command, and drives itself to work. At 16 you would have done anything for a spaceship like this. We had no idea what technology had in store back then but we kept evolving along with it and, by doing so, those new technologies have greatly improved our lives.

What if your insurance business was your vehicle? Are you still cranking your windows down like when you were 16 without AC, or are you rolling around in an advanced car that takes the work out of driving and makes your life easier? If it has been a while since you looked around to see what is on the market, it might be time to schedule a test drive and see what you are missing out on.

With a unique proprietary technology offered through a limited distribution by our firm, you can upgrade your business and open the door for opportunities you would not have had with outdated business models and strategies. This one-of-a-kind technology can market, educate, and enroll your clients or prospects into a hybrid premium finance product using indexed universal life insurance.

Rather than cover the inner workings of a specific product, rates, or regulations, we will cover how this new technology and service enhancement can put the power into the hands of your clients like never before. You may have thought that the first vehicle you had when you were 16 was great, but now that you are driving the number one electric car, you understand that our lives can be exponentially better with the right technology.

In the next few decades, your aging clients will transfer over $84 trillion of wealth to the next generation. The purchasing habits of your prospects and customers have changed. Millennials are becoming the most successful generation of their age. #social #media is omnipresent. DIY culture is becoming more popular with advancing technologies allowing for increased independence. Is your practice evolving, or are you getting left behind while the industry evolves without you?

In the ever-changing landscape of the insurance industry, one sector that has witnessed remarkable transformation is premium finance life insurance. The catalyst behind this evolution? Technology. These key points profoundly impact the role of premium finance in the life insurance industry and create tremendous opportunities for financial professionals such as yourself.

1. Enhanced Customer Engagement
   In the digital age, customers are more informed and demanding than ever. The accessibility of information has empowered them to make informed decisions about their insurance needs. Technology has enabled insurers to have more personalized and engaging interactions with their customers. For financial professionals, this means leveraging customer data analytics to tailor plans that align with individual needs, thus improving client retention and satisfaction while increasing sales.
   The proprietary technology mentioned allows your prospects or clients to create usernames and passwords for your unique premium finance ecosystem. In this ecosystem, they can access a library of videos with topics ranging from index universal life insurance product knowledge to how we use leveraging to accomplish financial success.
2. Streamlined Underwriting Processes
   As most readers likely know, the old underwriting in the life insurance industry was a time-consuming and paper-intensive process. However, incorporating big data, such as artificial intelligence (AI) and machine learning contributes to underwriting becoming more efficient and accurate. These tools analyze large amounts of data, making it easier for insurance companies to assess risks, determine premiums, and expedite policy issuance to days, not weeks.
   Imagine administering an entire premium finance plan from one central online space without bringing in multiple parties like banks, attorneys, or trust companies to slow down your process. The premium finance plans of old sometimes took six to nine months to administer, but now we can accomplish everything in as little as 30 days using this new technology.
3. Digital Distribution Channels
   The DIY culture and the rise of digital platforms have revolutionized the distribution of insurance products. Online platforms and mobile apps have made it convenient for customers to research, compare, and purchase policies with just a few clicks. Most financial professionals embrace digital marketing strategies for reaching a broader audience and streamlining policy sales.
   Social media has been a new catalyst for change in the insurance industry. Not all of this change has been good. Prospects and clients are ingesting information from online influencers, and most of these influencers are inexperienced and causing harm to the industry. That is why it is more important now than ever to control the narrative, and the new technology in discussion does just that. The last thing we want is for someone to Google a topic to “research on their own.” Especially premium finance. Therefore, the more quality-controlled information we put in front of our clients, the better.
   The premium finance side of the life insurance industry is on the cusp of a technological revolution. For insurance agents, this presents both challenges and opportunities. Embracing technology can streamline operations, enhance customer engagement, and increase sales and profitability. Adapting to these changes proactively and staying updated with the latest advancements to remain competitive in this dynamic industry is critical.
   As financial professionals, your role in this transformation is pivotal. By harnessing the power of technology to serve your clients better, you cannot just thrive in this evolving landscape but also contribute to the growth and prosperity of the whole industry.

Today we are talking about a remarkably interesting topic that most consumers and advisors have never even heard of, or spent the time to truly dive into: Premium financing a life insurance policy. The reason this is a great topic is because I’ve heard many people in the past say, “Yes I want life insurance; I just don’t want to pay for it.” It’s the old “Have your cake and eat it too” saying at play here. If you are able to explain what life insurance can do for a client without calling it life insurance, I can promise you every person you speak to will want what you’re talking about—whether it’s protection for the family in case one dies too soon, tax deferred accumulation, tax free income, liquidity, use, control, or coverage in case of illness along the way. The list goes on.

My goal with this article is to show you how to use “OPM” (other people’s money) to pay for what I like to call the Swiss army knife of planning: Index universal life insurance. What makes this such a timely topic is that everyone is having cash flow constraints at the moment due to inflation and volatility. Being able to show a client that they can accomplish the same objectives with less out-of-pocket payments or accomplish three, five or even 10 times the amount of benefit using the same out-of-pocket payments is crucial. Everyone wins. Bonus points are in play for advisors focused on assets under management due to the fact that we are now giving your clients the benefits of life insurance without reducing your AUM dollar-for-dollar.

Whether your goal is to become an expert in legacy building, estate planning, tax-free income, insurance planning for your business, or to simply be your own banker and diversify and protect your money, this concept can be a perfect fit for a well-structured plan or portfolio.

Before we go over the “how,” let me set the stage.

I want you to raise your hand if you’re a little uncertain about the future of our economy. If your hand is up, don’t worry, you’re not alone. My hand (both of them, actually) and a lot of other people’s hands are up as well, and if your hand isn’t up then I’d say you’re either way smarter than all the rest of us or vice versa.

Why?

When it comes to investing over the last 10+ years we, along with our customers, have been at one of the best parties in the history of parties! An absolute rager! Unfortunately for most Americans though, the lights have come on, the proverbial punch bowl is empty, and it’s time to sober up and go home. This is a metaphor for the amount of “run up” the market and growth sectors have had for years. Now that the frothiness is subsiding, the market is repricing itself back to a more reasonable level and we are feeling the effects of the downward volatility. It is not all sunshine and roses in the investment world anymore.

We all know inflation has been running red hot. Due to the supply chain disruption the Fed will likely be raising rates throughout the year, which can cause volatility in the stock market and your investment accounts. Traditionally a safe alternative to stocks, bonds have had one of the worst starts to the year in a long time.

So the question is, where are your clients’ hard-earned dollars safe?

A good answer is with an insurance company, and specifically within cash value life insurance.

Remember, while everyone wants the benefits of life insurance, nobody wants to pay for it. As a quick reminder, IUL is a life insurance policy built for cash accumulation. You pay an after-tax premium, it builds up tax-deferred cash, and eventually there will be enough cash in the policy that you can use for tax-free income, large capital purchases, investing, business planning, etc. Again, the list goes on.

With that said, let’s talk about premium finance and some of the high-level mechanics.

With premium finance, instead of paying a premium directly to the insurance company, you will pay a contribution to a lender and the lender pays the premium for you to the insurance company as a loan. Eventually there is enough cash value in the life policy to pay the lender back using a participating policy loan from the insurance company, and your life policy is now free and clear from the lender to be that Swiss army knife of planning.

To better illustrate how to premium finance a life insurance policy, check out the graphic.

A couple key metrics here are the death benefit and income, premium, out-of-pocket contribution, collateral, and leverage. If you tell us how much you want to contribute, how much leverage you want, and what your goal is, we can design a plan to meet your objectives.

On our vertical axis we have the reward, which I like to think of as the good stuff. These are the benefits we already mentioned (death benefit and/or income, etc.).

On our horizontal axis we have the risk spectrum. This isn’t like the risk you’re familiar with though. Remember, we already said that life insurance is a great place to put assets right now, so this risk isn’t in the same category as stock market risk or inflation risk. This risk is defined as the possibility that your life insurance policy performance does not exceed the borrowing rate for your loan. Put another way, we are not able to sustain positive arbitrage between the loan rate from the bank and the credited interest to your index universal life policy. An important note here is that we only need to earn approximately two percent (2.5 percent above our borrowing rate) to have a successful plan depending on the amount of leverage used.

Our diagonal line is premium, which is typically correlated to the amount of leverage used. The more premium paid into the policy, the more reward you get. Notice the lower left portion is self-funded, which means we have the lowest risk but we also have the lowest reward. You do get compensated for the amount of risk you’re willing to take with lots of reward.

The blue line is your out-of-pocket contribution to the lender. Out-of-pocket will typically stay constant and is usually paid for five to 10 years. As your out-of-pocket goes up, so can the premium and ultimately your output which is more death benefit or income. If we keep your out-of-pocket the same, and increase leverage, then your output can go up as well. If we do this there is a chance you may need to post gap collateral (as shown in black). Gap collateral is roughly the difference between the cumulative loan and the cash value in the life policy. An important note here is that the low point cash value calculations that lenders use to calculate gap collateral is not as simple as a cumulative bank loan minus cash value of the policy math equation. Any loan ledger showing this as the collateral calculation should be of concern. This is the number one reason these plans do not stay on the books. Advisors do not do a good job explaining the collateral requirement. As a result, clients get upset and refuse to post collateral, lenders don’t pay the premiums and policies lapse. Lose, lose, lose. It’s crucial when you’re illustrating a plan that you stress test the collateral by increasing the borrowing rate or decreasing the policy performance. Therefore, the client is fully aware of potential future obligations.

Notice as we increase premium and keep the out-of-pocket the same, we are increasing leverage on the policy which can reap great reward. If we stay around three times leverage, we typically do not need any collateral. As we go above three times leverage there may be a need for gap collateral which is fine. When collateral is used correctly, it can reap lots of reward as well. Those who understand leverage in premium finance can keep their out-of-pocket costs low and reward extremely high. They are essentially getting all the benefits of life insurance without having to pay the full sticker price. OPM–other people’s money!

In this example in the graphic this person had an all-in budget of $500,000, and if they were to use leverage they could potentially get $5 million of premium into a cash value life insurance policy and ten times the amount of income and death benefit!

In sum, the entire premium finance plan is based on your goals and the amount of leverage with which you are comfortable. If you want to pay cash for your policy it can still easily meet your objectives. However, as we just showed, those that understand leverage and how to use other people’s money can take their same out-of-pocket premium they were going to use to pay cash for their policy and leverage it up to get three times, five times, even 10 times the amount of premium in the policy and reap 10 times the reward whether it be death benefit for your family or business or tax free income for your retirement.

Remember: When we have uncertain times in our economy—inflation is high, markets are volatile, and insurance companies are doing well—cash value life insurance can be a safe haven for your hard-earned dollars. With the correct use of leverage and other people’s money we can accomplish much more with your same out-of-pocket budget. So, the party doesn’t have to be over and the punch bowl maybe isn’t empty just yet. It’s simply time to ask the DJ to change the song, turn it up and party on!