The Wealth Advisor Life Letter

Your Life Insurance Retirement Plan (LIRP) Is A Stable Part of Your Portfolio

It is well-established that a tax-efficient strategy to increase savings in addition to, or in lieu of, traditional qualified plan options is to maximum fund a cash value life insurance policy. In fact, recent tax law changes have made it possible to save up to two or more times the amount of money in a cash value policy for the same expense load, dramatically increasing the power of a life insurance retirement plan (LIRP). The ability to grow policy funds tax-free and to access future income tax-free without age restriction is unmatched. Plus, should the unexpected occur and you die early, the policy’s income tax-free death benefit can make your savings strategy whole and provide for your family.

Unfortunately, putting money aside for any purpose, even savings, can seem more like an expense rather than investment. A LIRP, despite all its attractive benefits, is often viewed as a necessary evil to meet savings goals. Little or no thought is given to a LIRP as a contingent asset class whose cash value and death benefit can play a vital role in balancing an investment portfolio and shaping investment behavior. A LIRP fits in your investment portfolio as a stable asset class with a high probability of an expected return.

Traditional Investment Analysis: Only Considering Expected Return

By taking an investor’s view of a LIRP, the life insurance policy is analyzed similarly to how other investments such as bonds, stocks, alternatives and private equity are reviewed. This apples-to-apples analysis shows just how influential a LIRP is to a well-performing investment strategy. Unfortunately, the outdated view of how to treat life insurance by the investment community was to only consider the expected return on the income tax-free death benefit when it is paid or the expected return on the cash value at the time of distribution.

These expected returns were assessed by either calculating the return on the death benefit or the cash value against the premiums paid over the life of the policy. Generally, at life expectancy, most clients will realize a return on the death benefit from a general account permanent type of life insurance, such as whole life or universal life, of between 5% and 7%. This is a decent return in the middle of the returns expected from private equity and government bonds.

The expected return on cash value is typically slightly lower with general account permanent policies since, in a LIRP, a policy’s cash value will likely be accessed well before the death benefit would be paid. However, LIRP participants are increasingly choosing variable universal life (VUL) policies with far greater upside potential than general account policies such as whole life and universal life. This can raise a LIRP’s cash value’s expected return significantly.

Completing a LIRP’s Investment Analysis

Simply basing an investment analysis on a LIRP’s expected return from its cash value or death benefit is an incomplete approach. Investment managers who utilize LIRPs as a contingent asset class take two more steps for a complete analysis. These additional steps were laid out by economists Harry Markowitz and William F. Sharpe, respectively.

First, in a 1952 essay, Markowitz published his Modern Portfolio Theory where he, theorized that, in addition to determining an expected return, individual portfolio assets should also be analyzed for their expected risk, which is the risk of not achieving the expected return.

Then, in 1966, Sharpe developed what is now known as the Sharpe Ratio. The last step to complete an asset class analysis relies upon the Sharpe Ratio to measure the performance of an investment, such as a private equity investment or securities in a portfolio, compared to a risk-free asset, after adjusting for its risk. The Sharpe Ratio describes how well the return of an asset rewards the investor for the risk taken and is used to compare one asset against another to attain the optimal portfolio based upon a client’s tolerance.

Judas, J. C., & Fontanini, M. (2020). Life Insurance: A Valuable Contingent Asset Class??Trusts & Estates,?159(8), 34–38.

Markowitz, Harry M. (1952). Portfolio Selection.?Journal of Finance?7.

Sharpe, William F. (Fall 1994).?The Journal of Portfolio Management.

Finding the Expected Risk of Obtaining an Expected Return on Life Insurance is Key

Calculating the expected risk associated with obtaining the expected return from life insurance is measured by standard deviation, which is the average amount by which returns over a specific time vary from the mean. Specifically, death benefit deviation is the average amount by which the projected return on investments (“ROIs”), adjusted for their probability of occurring, vary assuming death occurred in any year.

As they are contingent upon mortality and not the markets, each projected ROI is adjusted for and multiplied by the corresponding probability of surviving to and dying at each age. A standard deviation is calculated on these probability weighted ROIs. The lower the standard deviation, the less risk there is of not obtaining the expected return. Standard deviations for life insurance based upon mortality among various ages, sex and health risks are commonly quite low, ranging from .15% to around 1.00%.

Similarly, standard deviations for a life insurance policy’s cash value are the average amount by which the projected ROIs, adjusted for their probability of occurring, vary assuming the cash value balance in any year. Standard deviations for life insurance based upon cash value are also commonly quite low, though, tend to be marginally higher since, as mentioned, many LIRP participants favor VUL policies that can have more volatility in their cash value accumulation.

Conversely, the standard deviation for other assets classes is considerably higher — over 4% for bonds and over 17% for stocks. Investment managers are able to visualize this risk-return for various asset classes by plotting them on a chart where the vertical axis is the expected return, and the horizontal axis is the expected risk. This ‘efficient frontier’ demonstrates the maximum return for a given risk or a minimum risk for a given return.

Judas, J. C., & Fontanini, M. (2020). Life Insurance: A Valuable Contingent Asset Class??Trusts & Estates,?159(8), 34–38.

2002–2021 Asset Class Returns, Black Rock,?https://www.blackrock.com/us/individual/literature/investor-education/asset-class-returns-one-pager-va-us.pdf, accessed 1 May 2022.

PREMIUM FINANCE OVERVIEW

Premium Financing?is a strategy whereby a qualified borrower accesses third party financing to pay for large life insurance premiums. Individuals and businesses can now obtain their desired amounts of coverage with minimal initial cash flow. The insurance loan is provided by large banks and institutions dedicated to meeting and serving the needs of high net worth and ultra-high net worth clients.

Premium Financing is widely accepted by the insurance companies and is reserved for qualified clients. Vérité’s expertise will help clients navigate through this process and determine the appropriate insurance company, the most competitive lender, and the best insurance design to maximize the plan and meet the clients objectives. The insurance companies have constructed products that are tailored for these financed plans to minimize outside collateral and maximize returns.

Vérité has been dedicated to the Premium Financing market since 2009. Vérité has a deep knowledge of the life insurance space with over 50 years of combined experience on the team. This insurance knowledge, coupled with our deep lending relationships, allows us to offer a turnkey approach with a suite of banks to meet each qualified client’s goals. Our dedication to this market and our track record has made us a preferred provider for many major insurance companies and lenders.

TAILORED PLAN

No two Premium Finance plans are the same and each plan is customized to the needs of the borrower. Several things will be considered and discussed before finalizing the plan, the insurance company, and the bank. Such as:

What is the client’s net worth, liquidity and income?

Is the borrower prepared to pay interest? Accrue interest? A combination of the two?

Where will the interest payment come from?

What will be the loan duration?

Is the client willing to create a relationship with the lending bank in addition to the Premium Finance loan?

What is the loan exit strategy?

How concerned is the borrower with interest rate risk? Is a fixed rate desired?

What is the current liquidity and short term projected liquidity to manage loan collateral?

What is the most suitable asset to pledge as collateral? (Typically real estate is not an option).

Are there considerations around a personal guarantee?

What individual or entity should own the life insurance?

What insurance company coincides best with the client’s profile?

PARTIES TO THE TRANSACTION

BORROWER:

The individual or entity being financially underwritten to qualify for the loan facility (individual, trust, corporation, LLC, non-profit);

GUARANTOR:

The individual or entity providing a personal or corporate guarantee for the loan. This can be waived for qualified borrowers and will be permitted by some banks;

INSURED:

Individual(s) being underwritten for the insurance;

INSURANCE CARRIER:

The life insurance company issuing the policy to be financed;

POLICY OWNER:

Person or entity that will own the life insurance policy that is being financed;

BENEFICIARY:

Person or entity that will receive the death benefit proceeds after repayment of any outstanding principal or interest on the loan;

ANK/LENDER:

The institution committing to funding the life insurance.

COMPONENTS OF THE LOAN

AMOUNT:

The initial funds dispersed at closing;

TERM / FACILITY:

Initial loan facility from 1–10 years with renewals;

RATE:

Prime or LIBOR based with a spread. Most interest rates are variable but fixed rates are available. Typically designed with either full interest payment or a designated cash flow.

COLLATERAL:

Loans must be 100% secured at all times. The primary collateral is the insurance policy(s) and its Cash Surrender Value (CSV) at a 90–100% advance rate. The borrower often has to pledge additional assets to secure any shortfall between the end of year loan and the CSV. These assets include but are not limited to other insurance CSV, Letter of Credit, cash, and securities.

It is important to understand that unlike interest, which is a true cost, collateral is more of an inconvenience. It involves moving “money” from one bank to another or assigning an asset. As long as there is no default, the “money” remains in the possession of the borrower, and in some cases, the borrower may even be able to have their investment advisor manage the collateral.

ABOUT THE BANKS

There are essentially two types of banks; the first are known as?“non-relationship”?banks and their only mission is to make Premium Finance loans and earn interest and fees (if applicable). Typically, they have higher interest rates but are more flexible with collateral and will often give 100% credit to Cash Surrender Value (CSV) for collateral.

Vérité refers to the second type as?“relationship”?banks. They have an interest in making loans for high net worth borrowers, primarily as a means to ingratiate themselves with said borrower/family. They require some form of relationship up front, most often a depository/investment relationship, typically starting at $1,000,000. A meaningful relationship will result in better pricing than the “non-relationship” banks can offer.

FROM THE BANKER’S VIEWPOINT

When Vérité submits to the banks, it is important to be aware of what they look for. The financial underwriting the bank performs is different than the underwriting process and qualification required by the insurance companies. Approval of a $10,000,000 policy with carrier XYZ in no way guarantees approval of the $1,000,000 loan to fund that policy. Vérité has found that ALL banks evaluate five main criteria.

These are provided as general guidelines:

NET WORTH |?Net worth is flexible and based on the insured or grantor’s overall financial picture. In most cases, the minimum net worth is $5,000,000.

COLLATERAL |?Where will the collateral come from to secure the initial shortfall, if one exists? More importantly, does your balance sheet show the ability to manage the future collateral needs of the plan?

LIQUIDITY |?Liquidity is a measure of the client’s ability to post the required collateral and easily access the funds to pay-off the loan if needed. Regardless of the cash value, banks want to see some amount of outside liquidity. As a rule of thumb, it is easier to secure financing for a borrower with a $20,000,000 net worth and $5,000,000 of liquidity than one with $50,000,000 of net worth and $1,000,000 of liquidity

INCOME |?Is the income sufficient to service the loan in addition to the borrower’s current expenses and liabilities (mortgage, business debts, alimony, etc.)?

EXIT STRATEGY |?How will the loan be paid back?

There are three (3) primary exit strategies:

– The CSV can be used in part or in total to repay the loan;

– The borrower has a planned “event” in which cash is created to repay the loan. An example of this would be the sale of a business;

– Elder insured can plan for the death benefit to repay the loan.

IDEAL CLIENT SHOULD POSSESS

– A net worth in excess of $5,000,000, but typical is $20,000,000+;

– A legitimate life insurance need for estate planning, asset class purchase, corporate buy/sell, key person insurance, charitable planning, and tax-free cash value accumulation, etc.;

– An understanding of leverage;

– A desire not to liquidate assets/investments to pay life insurance premiums;

– A concern about potential gift taxes;

– A willingness to have “skin in the game” either through the pledging of acceptable collateral and/or the payment of loan interest.

IDEAL CLIENT BY INDUSTRY

Real estate owners, developers, and managers;

– Privately held business owners;

– Multi-family offices;

– Corporate executives;

– Hedge fund owners and managers;

– Private equity investors;

– Physicians;

– Successful professional advisors.

WHAT YOU SHOULD BE EXCITED ABOUT

ADVANTAGES OF PREMIUM FINANCED LIFE INSURANCE

– Reduce or eliminate the out-of-pocket cost for life insurance;

– Increased cash flow flexibility;

– Take advantage of an insurance company’s crediting rate that may outperform the borrowing costs;

– Opportunity for savings through an alternative investments by not paying the premiums to outperform the borrowing cost;

– Given a set cash flow, Premium Finance will afford you the opportunity to purchase more life insurance than if a client just pays the premium;

– Reduce or eliminate gift taxes.

WHAT YOU SHOULD BE AWARE OF

CONSIDERATIONS/RISK OF PREMIUM FINANCED LIFE INSURANCE

Premium Finance is a complex strategy involving several risks:

HIGHER RISKS

–?Interest Rate?|?the risk that the loan rate may grow higher and faster than anticipated (fixed rates and hedging options are available to mitigate this risk);

–?Policy Performance?|?the risk that policy will not perform as projected and the cash value will be lower than expected;

LOWER RISKS

– Collateral?|?the collateral that the borrower posts in addition to the insurance policy is at risk if the loan is called and is unable to be repaid or refinanced;

– Renewal?|?the possibility that the bank will not extend financing beyond the initial commitment;

–?Change in Financial Condition?|?a severe adverse change in the borrower’s financials could cause the bank to call the loan if covenants are broken.

INSURANCE POLICY OPTIONS / DESIGNS

Vérité works with A rated insurance carriers and uses cash value life insurance products to finance policies. Each of our Premium Finance loans is specifically designed in accordance with the client’s financial objectives.

The most common funding design is maximum Non-MEC funding for 7–10 years. Based on the client’s financial situation, goals, and objectives, can explore paying interest as due annually, accruing interest or some combination to be determined. We illustrate an initial interest rate we believe to be realistic based on the current environment and size of the premium borrow. The interest rates are then projected forward based on an increasing scale, derived from historical Prime and LIBOR rates.

Premium Finance designs are death benefit or income focused. On Death Benefit designs the objective is to maximize the client’s death benefit at life expectancy. With income designs, the objective is to maximize cash value and policy distributions. Based on the client’s goals the case design will differ. Good news, is that the client does not need to decide if the focus of the transaction is death benefit or income for at least 10 years. The design process is an art, not a science.

It is an iterative process and we work closely with the advisor and client to construct the best design to meet the client’s goals.

OUR RENEWAL PROCESS

PROACTIVE POLICY MANAGEMENT

The policy renewal process is just as important (if not more) than the beginning part of the transaction. This process is critical to the policy’s success as Vérité sees it as an opportunity to review its performance, loan terms, and design strategy. To help ensure the policy is performing as intended, they implement a three step process leading up to the policy’s anniversary date:

Step 1

60 Days Prior to Loan/Policy Anniversary

The Vérité team advises the agent of the upcoming renewal and projects what the interest rate and collateral could be.

Vérité then determines if the current lender and rate are still within the projected parameters, and if they aren’t, they look at necessary adjustments whether it be a rate reduction, a new lender, or other modifications.

Step 2

30 Days Prior to Loan/Policy Anniversary

Actual loan rate and collateral is finalized.

Renewal documents and invoices (if applicable) are sent to both the client, as well as the agent, for review.

Step 3

30–60 Days After the Renewal is Complete and Policy Has Credited (if Index)

Review of policy performance and design objectives. A revised loan illustration is completed to compare prior year and initial projections. At this time, Vérité reviews and determines if further adjustments need to take place.

PREMIUM FINANCE CHECKLIST FOR SUBMISSION

The following items are required to receive a term sheet:

ILIT TRUST / INDIVIDUAL BORROWER

Personal Financial Statement (PFS) — within 6 months

Liquidity statements — 60 days or less

Last two years of tax returns, including schedules (K1, etc.)

Copy of ILIT or other ownership document

Life Insurance illustration to be financed (if using Indexed UL, please illustrate at Insurance Carrier’s guaranteed minimum crediting)

CORPORATE SPONSORED

Two years of Corporate Financial Statements (Balance Sheet / Profit & Loss / Cash Flow)

Two years of Corporate Tax Returns

Company organizational chart including lists of Officers and Directors

The following additional items may be required to close:

Real estate schedule including recent appraisals if available

Rent rolls

Schedules of Account Receivables, Account Payables, and Inventory

Articles of Incorporation and bylaws

Other items that may be requested on a case-by-case basis.

The 7 Factors Of A Successful Sales Strategy

— No Bull

President/CEO of?Tyson Group, #1 WSJ and USA Today bestselling author, expert sales negotiator/consultant for the world’s biggest brands.

As a sales leader, are you the bull or the matador? What does bullfighting have to do with sales? A lot, actually. Let’s set aside the ethical debate and focus on the traditional spirit of this ancient sport. Who typically wins this struggle? If you said the matador, you are correct. Now let me ask the question a bit differently. Who is?built?to win the fight? Well, when you envision the thought of 1,000 pounds of muscle and razor-sharp horns charging at you with a single mission of doing you in, odds are in the favor of the bull.

So what accounts for the winning record of matadors across the ages?

Strategy

Speed, instinct, size, weaponry — none of that can beat a superior strategy. So what are the elements of the matador’s strategy? Distraction with the cape. Misdirection. Wearing the bull down minute by minute. And what do all of these things invoke in the bull? Anger. Frustration. Exhaustion.

Now, let me ask you again: As a sales leader, are you the matador or the bull? Do you often find yourself frustrated and exhausted with your sales team’s inability to reach their weekly goals? Does your sales team seem to chase distraction while wasting precious time, energy and resources? Are they effective but lack efficiency? Or efficient but lack effectiveness?

To succeed in achieving your sales goals, you (and your sales team) need to start thinking like matadors. And that means relying on a winning strategy that will allow you to take down the biggest bulls in the marketplace. Like bullfighting, sales isn’t rocket science. But there are several reliable factors involved in predicting and executing a successful strategy. In fact, there are seven of them.

1. Sales Leadership

This factor is at the top of the list for a reason. Sales leadership is critical, especially during difficult times like … well, now. More than ever before, it’s important for sales leaders to define culture and set clear expectations. They need to lead by their own behavior and value system. They need to get out of the way and trust the people they hired to do their thing. Sales leadership is an art. Don’t get caught up in micromanaging.

2. Sales Management

The volatile quality of the current marketplace can be daunting, but with strong sales management, your company can weather the storm. Good sales managers must work consistently to ensure the entire sales team is in sync with their KPIs, pipeline and goals. While sales leadership is an art, sales management is a science. Treat it as one and rely on the data, because numbers will never lie to you.

3. Sales Talent

The fact is, investing in your sales talent and fully understanding which competencies and talent profiles are most effective for your organization are critical to ensuring your company’s fiscal health and ability to scale. In the wake of the “Great Resignation,” your company’s ability to attract and retain a strong sales team is more critical than ever. But don’t think they’ll stick around for long just for the financial compensation. You also need to get them aligned with your company’s mission and invest in helping them evolve.

4. Sales Process

Getting your sales process down is one of the most critical factors behind high-performing sales teams. That’s because a sales team without a process is like a ship without a rudder. And in this climate, you can’t wait for the wind to blow you in the right direction. Not only can your sales process help define your Ideal Prospect Profile (IPP), it can also lead to marketplace opportunities. It will also allow you to scale quickly and efficiently.

5. Sales Effectiveness

Sales effectiveness involves detailed analyses of your overall productivity, efficiency, and goal achievement. After all, how do you know you’re winning the sales game if you’re not keeping score? Is your team effective without being efficient? Or are they efficient without being effective? There’s a difference between the two. You can land a $100,000 deal with a client, but if it costs you $95,000 to get there, you’re not dialed into full-scale efficiency. Whatever obstacles you face in your sales, when you measure results, you’re more likely to reach your goals.

6. Sales Methodology

If you don’t have a consistent sales methodology, you are leaving deals on the table. Period. Of course, this isn’t to imply any team should feel permanently tied to value-based selling or relationship selling or whatever else the flavor of the month happens to be. With all the variables to consider in today’s selling landscape, you should also be prepared to pivot and adapt your sales methodology to whatever your consumer base requires.

7. Sales Enablement

Is your sales team disabled by your sales enablement software? If your sales team is struggling with this factor in 2022, you’re never going to reach your sales goals. Covid-19 accelerated our need for and reliance upon comprehensive sales enablement software. When chosen carefully and used correctly, it can more efficiently connect you to customers, capture leads and close more deals.

For Whom The Bull Toils

Your sales team will never survive the bullfight if they don’t focus on perfecting these seven components behind their sales strategy. If you want them to help take your company to the next level, they need to start thinking like matadors.