Premium Financing = Leverage for a Business

Premium financing uses the leverage of bank loans to multiply the cash value in a life insurance policy.

With the proprietary strategy recommended by Shoreview Insurance, a bank loan triples your IUL premiums: you contribute $1X, the bank contributes $3X.

In contrast to many (or most) premium-financing plans offered in the market, the preferred, proprietary vehicle recommended here requires neither collateral nor personal or business guarantees from the borrower. This strategy is specifically designed so that there are no loan qualifications or loan documents signed by the employer or employee.

The 3X leverage is achieved through bank loans secured by the life insurance policy itself. The cash-value life insurance of this preferred vehicle is so secure and solid that the bank needs no further security.

Attract and Retain Employees by Offering Better Benefits

Key employees are the lifeblood of your company and it is crucial to be more attractive than your competitors. Benefits are necessary to recruit and retain your best employees, but most companies offer essentially the same benefits as everyone else. How do you offer more and set yourself apart?

This proprietary plan is a unique strategy that allows you to achieve a competitive advantage by offering the best benefits, provide more protection, and potentially save more for employees’ retirement. Simply put, this strategy provides your business the extra funding to set itself apart without having to increase your budget.

More Cost Effective than Traditional Plans

The real reason businesses are not offering additional benefits to their key employees is cost. This proprietary strategy uses leverage to help cover the costs of the additional benefits needed to attract top talent.  As noted above, a unique feature of the strategy is that there are no loan qualifications or loan documents signed by the employer or employee. The contributions made to the strategy act to fully secure the loan. Utilizing leverage allows companies to spend less on something that would otherwise be a substantial expense. This will ultimately improve your cash flow and decrease costs while offering the differentiation needed to compete for the best employees.

In addition, due to the high cost of benefits, businesses also find it difficult to provide adequate coverage for other business liabilities such as Key Person, Buy-Sell Agreements, Succession Planning, etc. These events can typically be funded at half the cost of traditional options with this proprietary leveraging strategy.

A Better Way to Fund Contingent Business Liabilities (Key Person, Buy-Sell Agreements, Succession Planning, etc.)

Key executives leave for a variety of reasons which can leave a business scrambling to cover their loss. They can become disabled, develop a chronic illness, retire, pass away, or simply leave. Most companies use their cash to grow their business and not to fund contingent business liabilities. This proprietary strategy helps provide the funding needed to protect your business in a wider variety of circumstances.

A Better Way to Informally Fund Deferred Compensation

This proprietary strategy is a superior way to informally fund Non-Qualified Deferred Compensation. By financing a life insurance policy as opposed to traditional investment alternatives, you get the added advantage of additional cash through the use of leverage, potential tax-deferred growth, protection benefits should something happen to the employee, all without downside market risk.

Leverage through premium financing enables substantial policy growth and flexibility, with substantially less drain on business assets and/or cash flow than without premium financing.

Preferred Business Candidate for Premium Financing

While not rigid, these general criteria may qualify employer and employees for the premium-financing strategy:

  • Age:  25 – 65
  • Minimum annual incomes: $100K – $400K
  • Good health
  • Ability of business to make five annual payments
  • Death benefits of $1.5 million or greater
  • Groups of 15 or more

How It Works

In years 1 – 5, the employer makes an annual premium payment. A preferred bank matches employer’s five premium contributions in years 1 – 5. After year 5, employer makes no more premium payments, but the bank matches employer’s previous premium contributions 2:1 in years 6 – 10. In other words, overall, the bank contributes 3X the amount of the employer’s contributions. The policy is then allowed to “cook” in years 11 – 15, allowing cash value to grow. The bank charges a low interest rate (e.g., LIBOR plus 1.75%). After 15 years, a policy loan is used to pay the bank the loan amount plus interest, and then the policy is free and clear.

Why does a bank participate with such low-interest loans? Because the bank is confident that the life insurance policy will not be surrendered and, therefore, it will collect its loan principal plus interest after 15 years. In other words, for the bank, it is a safe investment with a reliably predictable return. Especially since employer, the owner, has “skin in the game” through premium payments in years 1 – 5, and also because the policy is such a valuable asset, these policies are rarely abandoned.

Stress Tested

The preferred, proprietary plan recommended by Shoreview Insurance has passed “stress tests” under Great Depression conditions of the 1930’s and high-inflation conditions of the 1980’s.

What Makes This Proprietary Premium-Financing Strategy Different?

  • The proprietary strategy combines life insurance and bank financing in a unique way to leverage three times (3X) the amount of employer’s contributions to the trust without creating a liability outside of the policy for either employee or employer
  • Less expensive, better benefits, shorter financing
  • Only 5 planned contributions by employer to a trust
  • The potential for market growth without the risk of market losses due to a decline in the index
  • The life insurance policy serves as sole collateral for the financing, so employees are not required to sign loan documents
  • Converts incentive costs from a liability to an ASSET with corresponding improvements in earnings
  • The policy is jointly financed by both employer and bank

Death Benefit Protection:

A permanent life insurance policy with accelerated benefit riders (net of loan repayment) can provide benefits in the case of:

  • Death (and/or living benefit)Critical Illness (Cancer, Heart Attack, Stroke, etc.)
  • Critical Injury (Coma, Brain Injury, Paralysis, Burns)C
  • Chronic illness (assistance with daily living, bathing, eating, dressing, transferring, etc.)
  • Terminal illness (Illness where death is expected within 12-24 months. Term varies by state.)
  • Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless there is a need for life insurance.

Cash Accumulation:

  • Upside Crediting Potential (Interest Credited Based On Market Index)
  • No Loss of Cash Value, 0% Floor (Due To Declines In An Index)
  • Potential growth tax-deferred
  • Potential tax-free withdrawals (Access To Cash Value Using Tax-Free Policy Loans And Withdrawals)
  • Policy loans and withdrawals reduce the cash value and death benefit and may result in a taxable event.

For employers, this proprietary premium-financing strategy offers substantial balance sheet and cost advantages over other incentive strategies while dramatically improving key employee retention.

Applications:

This proprietary strategy can be an excellent tool to facilitate:

  • Recruiting and retention of key talent – this strategy instead of signing bonuses or large cash payments
  • New contract negotiations – this strategy instead of pay increases or pay reductions
  • Organizational consolidation – Integrating the strategy with existing plans, especially if plans are underfunded (removes a liability)
  • Cost reduction programs vs. pay and benefit cuts– this strategy saves money through lower administrative fees, potentially lower payroll costs, and only five initial payments that are less than half of what conventional solutions would cost.