Bill how to save more money fast boersma on life insurance fee based life insurance consulting

Wealthy clients have been approached to buy vast amounts of how to save more money fast life insurance for “free” or greatly reduced contributions by taking advantage of the perceived how to save more money fast arbitrage between low borrowing rates and high crediting rates. Models show growing policy cash values paying off the loans how to save more money fast down the road, leaving fully funded policies with little or even no money how to save more money fast out of pocket. It’s often presented as a very sophisticated strategy with smart how to save more money fast people using other people’s money. But it’s not that simple.

With rising borrowing rates and lower projected crediting assumptions, you’d think this strategy would go by the wayside, but it seems to actually be ramping up. The numbers are huge, and the deals tempting when well postured. Policies are generally much larger than consumers usually need to how to save more money fast jam the vast amounts of money (millions of borrowed dollars) into them in an attempt to grow cash value at how to save more money fast attractive rates to repay loans. The policies must be large enough to support the desired how to save more money fast net death benefit after million of dollars have been withdrawn how to save more money fast and/or borrowed out to pay the loans back. Some programs don’t even assume paying the loan back until death. These policies assume tens of millions of dollars, or even hundreds of millions of dollars of internal policy how to save more money fast loans. Every case I have on my desk has or will how to save more money fast drive six and seven figure commissions, which I have no issue with if they brought value how to save more money fast and worked as presented. With these kind of paydays, even the good guys can be tempted.

Again, the concept is sound, but the explanation and implementation is largely abysmal, and what many families are being sold stands little chance how to save more money fast of working out. Few understand the financing, the internal workings of the insurance contracts, the collateral requirements and the risks. Your clients may be more sophisticated than average, but you’d be surprised at the decisions they’re making and situations they’re getting themselves in to. It’s not pretty. I’ve seen the counsel for billionaire families get snowed.

First, most of the time premium financing is, rightly or wrongly, marketed as being all about arbitrage or “the spread.” however, many professionals who really understand this feel the spread needs how to save more money fast to be between borrowing rates and time value of money, not between borrowing rates and the life insurance crediting rates. Playing the spread is fine, if there is a spread. This is why I don’t pay off my 3.5% mortgage as I’m confident I can do better in the market with how to save more money fast my money. I won’t every year, and I need to understand the risks and be able how to save more money fast to cover my mortgage regardless of whatever else is going how to save more money fast on in life, but I’m comfortable with that.

There needs to be a spread, and here’s the rub. With WL, there isn’t a spread. It may look like it, and you or your client may have been told there how to save more money fast is. But, there isn’t, so let’s dissect this. A WL policy’s dividend rate isn’t something to focus on. That being said, every case I’ve seen was sold on the dividend rate. More precisely, it was sold on the dividend rate relative to borrowing how to save more money fast rates. An agent doing so is either ignorant or willingly misrepresenting how to save more money fast the numbers.

The dividend rate is the gross crediting rate on cash how to save more money fast value of a policy, but there are many charges and expenses that come out, so the effective crediting relative to premium is much lower. In fact, in most cases, it takes a decade or more for the cash value how to save more money fast of the policy to even equal the cumulative premiums. The cash value is underwater for years even if the how to save more money fast dividend rate is 6% or higher, actually, regardless of the dividend rate. Incorporate the borrowing rate and it’s even further underwater. There’s certainly a spread here but not the spread the how to save more money fast client understands there to be.

Now let’s look at LIBOR. We all know that LIBOR rates can be quite volatile. Just look at a LIBOR historic rate graph, and you can see it’s all over the place, and it can change very quickly. From 2008 to 2009 it went down 90%, and at other times, it shot up like a rocket. From 2017 to today it’s tripled, and today’s rate is over 15 times that of 2014. Often, the borrowing rates on premium financed deals are in the how to save more money fast neighborhood of 150 to 175 basis points (bps) over one month LIBOR.

What else was at play? The dividend rate of a WL policy is a portfolio how to save more money fast rate that lags the market. As older, higher interest rate bonds fall off the books, they’re replaced with new bonds at lower rates. I’ve seen instances in which an agent actually told the how to save more money fast policy owner that she would want interest rates to increase how to save more money fast because this meant the policy dividend rate would increase. There’s going to be a multiple year lag, and the dividend rate will always be tempered on the how to save more money fast low and high ends.

Let’s put all of these numbers together. If the borrowing rates today have reached 4% or higher and the IRR on premiums to cash value how to save more money fast for WL policies put in force in the past decade how to save more money fast are literally negative, where’s our arbitrage? As an aside, I’ve actually read an email from an agent to a how to save more money fast policy owner “confirming” a multi-hundred bp positive spread after year 1 when the cash how to save more money fast value was actually about a third of the first year how to save more money fast premium/loan. I must say, that’s quite the spread but unfortunately it’s significantly negative. At today’s borrowing rates, assuming no more increases, a contract that will never hit a 4% IRR on premium to cash value will be underwater indefinitely. It can’t work the way it was explained . The only reason it originally looked like it is going how to save more money fast to work is because the client is paying interest out how to save more money fast of pocket. But certainly that’s still a cost, is it not?

In the presentation, it looks like it’s going to work because the $14.5 million of cash value has to pay for only how to save more money fast the $10 million loan. It didn’t take the $5 million into account, which is kind of important when evaluating the “goodness” of the deal and whether there really is a positive how to save more money fast spread. Ignoring the risks involved in the transaction, the whole game was built on a positive spread and how to save more money fast that doesn’t exist. Anything can be positive if you pay enough money out how to save more money fast of pocket. If I bought a house for $1 million and had a $700,000 loan when the value of the house plummeted to how to save more money fast $500,000 as I sold it, but I paid off the shortfall with other funds, does that mean I didn’t lose money?

I bring this up because the numbers above are only how to save more money fast part of the story. These deals weren’t going to work as proposed from day one, but the deal has changed since then. Borrowing rates have increased much more and faster than projected, and dividend rates have come down significantly. So much for policy crediting rates tracking with the interest how to save more money fast rate markets, huh? Some of these clients assumed very low interest payments that how to save more money fast have now increased multiple fold to a point where it how to save more money fast hurts and may not even be feasible to pay, and the cash values are shrinking to a point where how to save more money fast the expected insurance won’t be supportable any more. Tons of insurance for little cost is turning into, relatively speaking, little insurance for tons of cost, and certainly not enough to make the pain and risk how to save more money fast worthwhile.

The policy dividend rates are what they are, and the borrowing rates are what they are. The cash value growth of the policies and the loan how to save more money fast interest due is what it is. The policy owners and their advisors and family offices see how to save more money fast that the numbers aren’t working, and they’re confused because they don’t know why. Yes, the dividend rate might have come down from 7% to 6%, and loan rates might have increased from 2% to 4%, but that purported 500 bp spread should still be 200 how to save more money fast right? Except for the nasty little thing no one acknowledges… expenses. If the expenses of the policies total about 300 bps, there isn’t a 200 bp positive spread, it’s 100 bps negative, and the numbers prove this out.

I’ve stated that these deals couldn’t work from day one as explained. Undoubtedly some will take issue with this because if policy how to save more money fast dividend rates didn’t come down and borrowing rates didn’t increase, the transactions would have panned out like they looked on how to save more money fast paper. However, the way they’re explained and sold is often based on misrepresentation, and this causes a transaction that would “work” on a razor’s edge to fall apart with normal and expected market how to save more money fast gyrations. That deal that purported a 500 bp spread was really how to save more money fast only 100 bps, and I imagine that advisors and clients who actually understood how to save more money fast this wouldn’t have pulled the trigger as quickly, if at all.

Why not the iuls? Because IUL contracts can be fudged. WL can be projected based solely on what it’s experiencing today or less. IUL can be projected based on back testing and illustrated how to save more money fast higher than many responsible professionals believe it should be illustrated. Many IUL contracts can be illustrated in the neighborhood of how to save more money fast 7%, and almost all of them over 6%. That may not sound aggressive until you understand how IUL how to save more money fast policies work. Almost no one does, and that’s the focus for another day.

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