Posted by Last Thursday, the Federal Reserve announced that it would maintain short-term borrowing rates in the 0%-0.25% range, and market borrowing costs will continue to remain low. This is undoubtedly good news for policyholders in the premium financing market that usually involves LIBOR interest rates and involves large loans.
The market benchmark interest rate fell. In the real estate market, the 30-year fixed mortgage interest rate fell below 3%, and the reduction in borrowing costs caused a round ofLoan to buy a houseAnd the wave of refinancing.
During the same period, in the high-net-worth life insurance (wealth management) market, thanks to the current low market borrowing rates, bank loans were used forLife insurance supplements retirement income, Or planning for wealth inheritance, has also become a hot spot in the market.
Before you understand and prepare to enter the premium financing market, we recommend that you fully understand its operating mechanism and advantages and disadvantages.
What is premium financing?Compared with buying a house
Premium financing,It refers to the way in which policyholders pledge their life insurance cash value assets to the bank in exchange for loans to pay premiums when applying for an insurance policy.
Premium financing is similar to buying a house with a loan. When we buy a house, we only pay a part of the funds to the financial institution (down payment). The financial institution helps us purchase the real estate, and we repay the principal and interest of the loan as agreed.
Let us illustrate with an example:
Mr. Wang, 45, intends to use a life insurance policy to carry out the whole family’sSupplementary retirement income planning.
When all premiums are paid by themselves
Mr. Wang is going to put it in the policy account every yearDeposit $20 USD, deposit for 10 years, totaling $200 million USD.After predicting the calculation results of the insurance design plan (as shown in the figure below), after Mr. Wang is 65 years old,Per yearFrom the insurance companyReceive approximately $46 tax-free1Retirement pension, stop receiving until the age of 100.
The situation of premium financing
If you use premium financing, Mr. WangBorrowing $50 from the bank every year, Deposited in the policy account, borrowed for a total of 10 years, and deposited a total of $500 million in the life insurance policy account.
Mr. WangPay the bank an annual principal and interest repayment of $10. Fifteen years later, Mr. Wang used the cash value accumulated in his life insurance policy account to repay all the remaining bank loans in one go.
After Mr. Wang was 65 years old,Per yearWill continue from the insurance companyReceive approximately $58 tax-free1pension.Stop receiving until the age of 100.
Comparison of self-paid premiums and loan premiums
From the picture above, we can see that when Mr. Wang pays himself,Need to pay $200 million out of pocket, And the expected retirement income stream in return is$46 per year.
Compared with the insurance premium financing plan, Mr. Wang pays $10 to the bank every year, accumulativelyOut of pocket $100 million, And the expected retirement income stream is$58 per year.
The out-of-pocket funds have been reduced from $200 million to $100 million. Under the same conditions, the expected retirement income stream has increased by $12 per year. This is the market-based leverage effect achieved through premium financing.
Am I suitable for premium financing?
Leverage means risk, and premium financing is not suitable for everyone.
Since the cash value life insurance policy itself provides a layer of leverage, the use of premium financing means that another layer of leverage is added.The existence of double leverage is extremely sensitive to the environment of rising borrowing interest rates. This is one of the potential risks of premium financing.
Secondly,The choice of products and solutions is also a key part.
Under the effect of double leverage, even small differences in performance indicators between insurance companies and insurance companies, between products, and weighted by the time factor, will cause large differences in the cash value of insurance policies.
Therefore, before proceeding with premium financing, policyholders need and specializeLife Insurance Financial Advisorcooperation, specific comparison and analysis of the performance and indicators of different insurance products.
Select life insurance companies and specific products issued by life insurance companies with strong asset management capabilities, relatively low costs, and relatively higher potential for cash value appreciation yields,And combine the dynamic balance of "risk tolerance" and "return potential" to finalize premium financingProposal plan.
Finally, the third key factor is whether we can obtain private loans from financial institutions at lower interest rates.
In the current low interest rate market environment, financial institutions are more inclined to borrow large amounts.For example, borrowing 50 US dollars per year.A large amount of borrowing usually means that the insured needs to have a higher net asset value or sufficient collateral.When these conditions are met, it will help the bank approve the application for premium financing.
In the American Life Insurance Guide community, some readers reported that a financial institution recently approved a credit line of $500 million with an annual interest rate of only 0.9%.
On the optimistic side, if the market rate of return is stable and the lending rate remains or continues to fall, a spread environment that is conducive to policyholders will be formed, and this situation will significantly increase the rate of policy completion.
Article summary
At the end of the article, we intend to emphasize again, "Leverage means risk."
Premium financing is a once again leveraged enlargement of life insurance products that already have a certain degree of "leverage".
Credit ratings and fluctuations in the interest rate market may cause losses to excessively leveraged financing schemes.We can look back on the history around us. In 1994, the Orange County government of Southern California caused a leveraged liquidation due to interest rate hikes, which led to municipal bankruptcy.2.
"Betting interest rates will go down to triple the existing portfolio... This type of gambling is simply unimaginable." —Charles Fish, 3/12/31
therefore,The number and the “leverage ratio” in the premium financing design plan are perhaps the least important factor in our decision to apply for an insurance policy for financing loans.
The assessment of the risk level of financing plans, risk management and response mechanisms should be the key to premium financing.
As a market with a well-developed and mature financial system, there are different premium financing solution providers in the American life insurance industry.In the configuration of life insurance of premium financing type, the problem that policyholders face is still we have repeatedly emphasized, "Faced with different choices, which one is more suitable for me?" This kind of market two-way selection problem.
American Life Insurance GuideAlways advocate "Learn Before You Buy"Principle. By understanding the basic operating principles of premium financing, policyholders can grasp the balance between "risk tolerance" and "income potential". With the assistance of professional life insurance brokers, policyholders can also pay for different premiums. Conduct comparative analysis on the advantages, disadvantages and risks of financing products and insurance solutions.
And it is this comparison process that can help the insured family complete the self-education on "premium financing" and "life insurance", and in this learning process, examine their inner risk appetite and finally make a decision.
(End of full text ©️American Life Insurance Guide Unauthorized reprinting is strictly prohibited)
Disclaimer:
*The content of this article is to explain to the public an existing market strategy for the purpose of learning and education.The graphs, values, and assumptions used are not guaranteed and may be changed at any time.The actual results may be more favorable or unfavorable than the situation described in the text.This article does not constitute the investment advice of the American Life Insurance Guide and the author, and support for related strategic plans, nor does it constitute the guarantee of the American Life Insurance Guide and the author on the subsequent tax consequences.
1. Use the method agreed in the life insurance company contract to borrow or withdraw. The insured has certain tax advantages. The specific withdrawal and borrowing conditions shall be subject to the prescribed documents of the insurance company and the insurance bureau. The content of the article is not as tax or legal advice .Please consult a professional before taking action on any information contained in this article.
2. "ORANGE COUNTY'S BANKRUPTCY: THE OVERVIEW; Orange County Crisis Jolts Bond Market", Floyd Norris, 12/08/1994, New York Times, https://nyti.ms/3eVgF43
