38 ID Trends NAILBA
Lessons learned from page 36
Expect and prepare for change
Most people understand that economic conditions change . However , the implications of economic changes are sometimes only reviewed in hindsight — though they should always be explored prior to implementation of any financial plan . Realistic assumptions should always be used to project the life insurance values as well as the loan interest rate . The client ’ s income and assets should also be evaluated to determine their ability to meet ( interest ) and collateral obligations over a wide range of conditions . Since changing conditions are a constant , it is crucial to have consistent ongoing monitoring and maintenance of any leveraged strategy . Failure to model and develop strategies that work over a wide range of conditions is probably the number one reason premium finance design may not succeed for the client .
Attention to illustrations
Designing the life insurance policy for best performance potential for a customer ’ s unique situation is one of the best ways to put them in a position for long term success with their plan . However , a life insurance product ’ s performance potential can be challenging to explore and structure with today ’ s numerous index strategy options and riders . Illustrations are deceivingly easy to generate , but that may lead to a false confidence that the design produced was providing optimum performance potential . There is no magic software solver or illustration wizard that is going to produce the best design out of the starting block . Always challenge every design you create ( we use produce 3 times right in a row ) to see if it can be improved .
Explore the risks and mitigations
There is risk associated with ALL advanced planning . Most business and individual clients are comfortable with some level of risk in their planning strategies . However , suitable risk for any design will vary by the client ’ s unique risk tolerance , financials , and other relevant factors . The risks associated with a client ’ s plan are often external in nature such as the changes in the economy or regulatory changes . Internal risks , such as inefficient product performance , are easier to mitigate with the life product and premium finance loan structure ( for example , collateral needs might be moderated by policy high early cash value riders ). There are generally costs associated with risk mitigation . With a High Each Cash Value ( HECV ) rider example , the cost may be higher internal policy charges which will have a negative impact on the product ’ s performance . Exploring the risks and mitigation strategies is a highly successful strategy to ensure the client understands the various risks and ways to manage those associated risks .
Structuring exit strategies
Building in ways to manage or unwind the premium finance loan can not only provide an efficient way to repay the loan but also provide “ cushion ” that allow designs to work over a wider range of economic conditions . Financial planning should always expect the unexpected . Accordingly , things are going to change and impact the best of plans . That is why building a cushion into a life insurance premium financing structure is so important to ensure the client is in the best position for success . Exit planning can involve sophisticated structures such as GRATS , or something as simple as additional gifts over time into the clients ’ ILIT . Efficiently structured exit planning can not only help the design weather dips in product performance , but also allow for changing interest rates by having additional assets available to be contributed and used to manage the loan .
Putting it all together
Premium financing can work successfully over a very wide range of interest rates and economic conditions . Setting the proper client expectations upfront is important to ensuring the design works long term . Customers should understand a core benefit of premium financing is the leverage of their retained capital . It ’ s not about the “ free ” life insurance that low loan rates and high policy performance projections can hypothetically illustrate . Risks and appropriate exit strategies must be accounted for and developed , respectively . As has been said many times , illustrations are only “ ink stuck on paper .” Partnering with experienced professionals is often the best way to avoid having the client end up with a design not worth the ink it ’ s printed on .
Chris Layeux , MBA , ChFC , CLU , is the Senior Vice President with Global Financial Distributors and an expert in premium finance and advanced life insurance planning concepts . Chris is a published author and speaker at industry events .