Growing Your
Business by
Serving the High Net–
Worth Market
For producer use only. Not for distribution to the public.
OLA 1854 T 1008
This material was not intended or written to be used, and
cannot be used, to avoid penalties imposed under the Internal
Revenue Code. This material was written to support the
promotion or marketing of the products, services, and/or
concepts addressed in this material. Anyone to whom this
material is promoted, marketed, or recommended should
consult with and rely solely on their own independent
advisors regarding their particular situation and the concepts
presented here.
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For producer use only. Not for distribution to the public.
The Problem
Consistent messages from high net–worth clients:
“I make an excellent rate of return on my money in my own
business, so it doesn’t make the best financial sense to pay
large premiums to a life insurance company.”
“My money is tied up in highly profitable investments.”
“I just don’t want to sell off my assets to pay the premiums
for the coverage that I need.”
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For producer use only. Not for distribution to the public.
The Solution
Premium financing allows clients to:
Purchase the life insurance needed to accomplish their
financial goals
Borrow the premiums and pay back the loan with the death
benefit or another exit strategy
Keep high-performing investments in place, without having
to liquidate to pay premiums
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For producer use only. Not for distribution to the public.
What Is Premium Financing?
Premium financing is a sophisticated strategy that
allows high net–worth individuals who need a large
amount of life insurance to leverage their assets in
order to pay premiums.
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For producer use only. Not for distribution to the public.
What Premium Financing Is Not
NOT a way to find premium dollars when the ability to pay
premiums does not exist
NOT a simple strategy
NOT a method that reduces the cost of buying life insurance
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For producer use only. Not for distribution to the public.
What Premium Financing Is Not (cont.)
NOT designed to allow clients to purchase life insurance
they couldn’t otherwise afford
NOT a method of selling life insurance to a client who would
not otherwise have the need for insurance
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For producer use only. Not for distribution to the public.
How Premium Financing Works
Simply defined: A means of borrowing money to pay life
insurance premiums
Interest is paid annually or accrued
Loan balance is collateralized at some level
Death benefit or another exit strategy is used to repay
loan principal
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For producer use only. Not for distribution to the public.
How Premium Financing Works (cont.)
The Process: Part A
Insurance professional works with Transamerica Premium
Financing team to:
Confirm eligibility and appropriateness
Identify acceptable lending programs
Provide case design and proposals
Work through concerns and questions from the client
and his or her advisors
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For producer use only. Not for distribution to the public.
How Premium Financing Works (cont.)
Part B
A financing package is submitted to the lender
Part C
An underwriting package is submitted to the carrier
Parts B and C occur concurrently
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For producer use only. Not for distribution to the public.
How Premium Financing Works (cont.)
Part D: Finalizing the Process
The lender reviews the loan package and prepares
a loan offer
The client approves the loan offer
Medical underwriting is completed
Policy issued
The lender wires premium payments to Transamerica
and the policy is placed in force
Collateral assignment is recorded
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For producer use only. Not for distribution to the public.
Typical Client Characteristics
60 to 80 years of age with a tangible net worth greater than
$5 million (excluding the residence)
Business owners with the majority of their assets fully
invested and illiquid
A need for life insurance with a premium requirement of
more than $100,000 per year
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For producer use only. Not for distribution to the public.
Typical Client Characteristics (cont.)
Trust grantor may be subject to gift taxes, if gifts to pay loan
costs exceed exclusion amounts
Wealth is illiquid, but assets are available for use as
collateral and can be liquidated at a later time
Demonstrate an understanding of financial leveraging and
are comfortable with the financing concept
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For producer use only. Not for distribution to the public.
Interest Payment Options
Interest Paid Currently
The loan is for the amount of premiums only. The client
pays the interest — in advance or in arrears — to the lender
out of own funds.
If policy cash surrender value exceeds the cumulative
loan amount, withdrawals may be taken from the policy to
pay interest*
* Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death
benefit or cause the policy to lapse. Please refer to your individual contract for provisions.
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For producer use only. Not for distribution to the public.
Interest Payment Options (cont.)
Interest Accrued on the Loan
Client does not pay the annual interest costs to the
lender. Annual interest due is added to the cumulative
loan principal and paid out of the policy death benefit at
the insured’s death.
Out-of-pocket costs are those related to the loan itself,
such as loan origination fees
Cumulative loan balance may quickly exceed the death
benefit when accruing interest
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For producer use only. Not for distribution to the public.
Interest Rates and Loan Structure
The interest rates charged on premium financing loans vary
by lender, but are typically based on LIBOR or Prime plus a
possible spread
The period of time for which the interest rate is fixed will
affect the rate charged
Generally, larger loans have lower rates
Lenders may charge a loan origination fee or other fees
that will increase the total cost of borrowing
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For producer use only. Not for distribution to the public.
Interest Deductibility
Individual taxpayers generally cannot deduct personal
loan interest
IRC Section 264 will disallow a deduction if the loan is used
to purchase life insurance and the business has an interest
in the policy
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For producer use only. Not for distribution to the public.
Collateral
Each lender’s collateral requirements will be different
Fully Collateralized: 100% of the cumulative loan balance is
collateralized by the policy cash value and assets other than
the pledged policy by the insured
Reduced Collateral Loan: Insured provides a minimum of
25% collateral, in addition to the policy cash value, as
security against the cumulative loan used to pay premiums
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For producer use only. Not for distribution to the public.
Types of Collateral
Lenders usually prefer certain types of collateral over
others, and may allow:
Cash
Letters of credit
CDs
Policy CSV
Traded securities
Personal guarantees
Government bonds
CSV of other policies
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For producer use only. Not for distribution to the public.
Gift Tax Leveraging
Policies owned outside the insured’s estate that are
premium financed may eliminate the need to gift the
entire premium
Only loan interest may need to be gifted
The loan interest may create gift tax liability if it exceeds
available exclusions and exemptions
Interest deferral increases the gifting leverage
No need to gift premium or loan interest
Does create a balloon note
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For producer use only. Not for distribution to the public.
Exit Strategies
Death of the Insured
Generally, simplest, most straightforward option
May need to reconsider if interest is deferred or loan
costs increase
Cash Value Option
Withdraw cash from the policy's cash surrender value to
pay back all, or a portion of, the loan balance
Grantor Retained Annuity Trust (GRAT)
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For producer use only. Not for distribution to the public.
Exit Strategies (cont.)
Use of a Term Policy
By financing a UL policy and accruing the interest, while also
purchasing a term policy equal to the amount of the cumulative
loan, the client’s out-of-pocket expense may be lowered.
Payments are fixed for the entire term of the loan by the term
policy premiums
Loan Repayment via Outside Funds — If Liquidity Event Occurs
Outright gifts
Liquidation of a business interest
Existing assets already held by policy owner
Charitable Lead Trust
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For producer use only. Not for distribution to the public.
Benefits to Client
Reduces client’s cash outlay in early years
Life insurance cash surrender value may serve as portion
of the collateral
Attractive interest rate on borrowed funds
LIBOR vs. Prime
Client may not have to liquidate assets
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For producer use only. Not for distribution to the public.
Benefits to Client (cont.)
May produce a positive arbitrage if loan interest rates are
lower than crediting rates
Depending on lender, loan may be paid off at any time
without prepayment penalty or paid upon the death of
the insured
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For producer use only. Not for distribution to the public.
Risks
Loan Interest Rate Risk
Interest rates may only be locked in for a limited period
of time (e.g., 1–10 years)
A rise in rates could result in additional collateral,
less net death benefit, etc.
Interest rates will fluctuate over time
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For producer use only. Not for distribution to the public.
Risks (cont.)
Policy Crediting Rate Risk
Crediting rate may be less than anticipated interest rate
Collateral Call Risk
In the event of a loan default, supplemental collateral could
be called
Decreased policy interest crediting rate could lead to a
collateral call
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For producer use only. Not for distribution to the public.
Case in Point
Michael, age 65
Life insurance need established at $5,000,000*
Annual premium of $104,948 for non-financed premium
Annual premium of $172,774 for financed premium;
guaranteed, with return of premium death benefit
* Male, 65, Preferred Nonsmoker, TransACE®
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For producer use only. Not for distribution to the public.
Case in Point (cont.)
Year 10 Cumulative Results
Policy cost by
not financing
Interest cost by
financing
Difference in paying
interest vs.
paying premiums
$1,049,480
$570,154
$479,326
Loan interest rate assumed is 6%
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For producer use only. Not for distribution to the public.
History of Premium Financing
Personal Funding of Premiums
Insurance is based on need
Insurance is tax advantaged
Premiums paid by the owner on an after-tax basis
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For producer use only. Not for distribution to the public.
History of Premium Financing (cont.)
Traditional Premium Finance
Real need for insurance
High net–worth individuals began leveraging by
using a bank’s funds
Loans are 100% collateralized and interest is
paid annually
The goal was to have the capital invested in high performing
assets (small business, alternative investments, etc.) with
return greater than the premium finance loan interest rate
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For producer use only. Not for distribution to the public.
Alternative Premium
Financing Approaches
Inappropriate Use of Premium Financing
Investor origination rather than real need
“No Risk” or “Non-Recourse” financing approaches
Two-Year Fund and Flip
Fundamental shift in the market
Producers and program sponsors begin pitching
the financing before the insurance
Free insurance inducements
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For producer use only. Not for distribution to the public.
Other Types of Programs
Inappropriate Programs
Stealth
Investor programs do away with the financing altogether
Instead:
Transfer trust certificates, sell put options,
convertible term funded by the producer
Structure around the carrier questionnaire
100% investor driven
No insurance need present
Cash inflow to the client
No outlay for the client
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For producer use only. Not for distribution to the public.
History of Premium Financing
Current Trends in Financing
Financing based on a real insurance need
Reduced collateral
Term of years is flexible
Interest deferral
Note: Beware of unreasonable loan costs
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For producer use only. Not for distribution to the public.
Legal and Tax Considerations
Premium financing has insurable interest as well as tax
implications in a number of areas including estate, gift and
income taxes
Increasing state concerns in new laws and regulations
aimed at abusive approaches
Clients must rely on their independent legal and tax advisors
to navigate through the various tax and legal issues
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For producer use only. Not for distribution to the public.
Why Premium Financing?
Borrowing premiums allows current investments to
remain intact
There may be tax and economic consequences associated
with liquidating the assets
The continued growth of assets may be a better use
of money
May reduce annual gifting requirements
Premium financing could be one possible strategy to reduce
annual gifting
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For producer use only. Not for distribution to the public.
Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively
“Transamerica”), and their representatives do not give tax or legal advice. This material is provided for
informational purposes only and should not be construed as tax or legal advice. Clients and other
interested parties should rely solely upon their own independent advisors regarding their particular
situation and the concepts presented here.
Discussions of the various planning strategies and issues are based on our understanding of the
applicable federal laws in effect at the time of publication. However, these laws are subject to
interpretation and change, and there is no guarantee that the relevant authorities will accept
Transamerica’s interpretations. Additionally, this material does not consider the impact of applicable
state laws upon clients and prospects.
Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims
any express or implied warranty as to the accuracy of any material contained herein and any liability with
respect to it. This information is current as of April 2008.
TransACE® is a nonparticipating, flexible-premium universal life insurance policy issued by Transamerica
Life Insurance Company, Cedar Rapids, IA 52499. Policy Form #1-1261107, Group Certificate #2-72336107
for certificates issued under a group policy issued to the Rhode Island National Consumer Protection
Trust. Policy form and number may vary and this policy may not be available in all jurisdictions.
TransACE® NY (Policy Form #3-12638107 CVAT) is a nonparticipating, flexible-premium universal life
insurance policy issued by Transamerica Financial Life Insurance Company, Purchase, NY 10577. This
product is available only in New York.
Transamerica Financial Life Insurance Company is authorized to conduct business in New York.
Transamerica Life Insurance Company is authorized to conduct business in all other states.
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For producer use only. Not for distribution to the public.
Growing Your
Business by
Serving the High Net–
Worth Market
For producer use only. Not for distribution to the public.
OLA 1854 T 1008