Premium Financing for Life Insurance

ushdadude

Level 2 Member
I decided that it's finally time to get some life insurance and one of the salesman I spoke with had an interesting idea.

He mentioned that there is a company that offers premium financing to individuals who would not normally qualify for that type of policy. They do this by forming groups of 100-150 individuals. Basically, the insured pays in for the first 5 years and the bank pays in for the first 10 years. After that, the rate of return on the investment (in this case it is tied to the S&P) out-performs the interest of the loan. In year 15, the remaining principal is paid off and you're left with a policy that continues to increase.

Thoughts?
 

Matt

Administrator
Staff member
I decided that it's finally time to get some life insurance and one of the salesman I spoke with had an interesting idea.

He mentioned that there is a company that offers premium financing to individuals who would not normally qualify for that type of policy. They do this by forming groups of 100-150 individuals. Basically, the insured pays in for the first 5 years and the bank pays in for the first 10 years. After that, the rate of return on the investment (in this case it is tied to the S&P) out-performs the interest of the loan. In year 15, the remaining principal is paid off and you're left with a policy that continues to increase.

Thoughts?
Why do you want life insurance? Is it to cover your family for a certain period of time, or something else? If you want to provide coverage for your family it is best to look at simple Term Life.

Here's some questions:

  • How much are the premiums, the death benefit and the final value of this 'Premium' policy?
  • How much would Term Life premiums be for the same death benefit?
Another one might be:

  • How much does the rep get paid for the 'Premium' policy?
There are times when you can look at cash value policies, such as Whole Life, Variable, Universal, etc, but they typically apply to people who have a lot of tax concerns from other assets, and 7 figure net worths. Even then they don't always work.
 

ushdadude

Level 2 Member
Why do you want life insurance? Is it to cover your family for a certain period of time, or something else? If you want to provide coverage for your family it is best to look at simple Term Life.

Here's some questions:

  • How much are the premiums, the death benefit and the final value of this 'Premium' policy?
  • How much would Term Life premiums be for the same death benefit?
Another one might be:

  • How much does the rep get paid for the 'Premium' policy?
There are times when you can look at cash value policies, such as Whole Life, Variable, Universal, etc, but they typically apply to people who have a lot of tax concerns from other assets, and 7 figure net worths. Even then they don't always work.
The way it was explained to me is that the main benefit is that you get a larger policy than you normally would because the bank is paying most of the premium. Other benefits include the fact that you can draw on it when needed (assuming the loan is paid off). You can also draw from it at retirement and still leave over plenty in death benefits. So it basically is an emergency fund, IRA, and life insurance policy in one....and all withdrawals are tax free.
The example I was shown said that the premiums would be 20k for 5 years (pretty significant sum) but that's it. IN theory, if you never withdrew, the death benefits would be about 7 million.
 

Matt

Administrator
Staff member
The way it was explained to me is that the main benefit is that you get a larger policy than you normally would because the bank is paying most of the premium. Other benefits include the fact that you can draw on it when needed (assuming the loan is paid off). You can also draw from it at retirement and still leave over plenty in death benefits. So it basically is an emergency fund, IRA, and life insurance policy in one....and all withdrawals are tax free.
The example I was shown said that the premiums would be 20k for 5 years (pretty significant sum) but that's it. IN theory, if you never withdrew, the death benefits would be about 7 million.
OK we need to clear some things up here. You are being sold to, by a guy who earns commission.

Now, lets focus on two things again:

1. Why do you want life insurance? You didn't answer that question. Is it to provide for your family in the event of your untimely death? If so, how much cash do they need to cover debt/mortgage/college/life/etc?
2. Premiums of 20K (is that annually?) for 5 years = 7M? Is that over a really long time?
 

ushdadude

Level 2 Member
OK we need to clear some things up here. You are being sold to, by a guy who earns commission.

Now, lets focus on two things again:

1. Why do you want life insurance? You didn't answer that question. Is it to provide for your family in the event of your untimely death? If so, how much cash do they need to cover debt/mortgage/college/life/etc?
2. Premiums of 20K (is that annually?) for 5 years = 7M?
I'm assuming he makes a pretty sizable commission. :)
1. The main reason would be to provide after death. But the benefit of this type of plan is that you can draw on it while living and still leave over a sizable death benefit.
2. Sample given to me: Its 20k per year for the first 5 years (100k). The bank is contributing 250K over 10 years. You borrow from the bank at libor +~1.5%. The average return is ~8.25%. By age 65 you would have a cash value of ~1.4m with a death benefit of ~2.2m. If you don't draw and live until 85 (fingers crossed) it comes out to ~7m in death benefits.
 

Matt

Administrator
Staff member
OK, but there is a difference between a death benefit for today,and a plan for when you are 85 years old. Bear in mind I know nothing of your current age, family, debt etc....

So while an insurance policy is to provide after 'death' are you using this plan to cover you for when you are 85, or to cover now? You started out by saying 'its time to get life insurance' but why is that? Most people think it is time when they have a family or whatnot, but you are shooting long here with this plan.

I think that is worth thinking hard about - would 20 years of term cover your needs? If so, what would it cost per month (depending on age, possibly $600-$1200 per year vs $20K....

Next up is this 5 years, then the bank pays...

Why are you borrowing from the bank at 1.5 over LIBOR if 'the bank pays?' Sounds instead like you are paying in for 15 years, and the last 10 you pay interest too? It's unclear to me.

Long story short, this plan smells like it is loaded with fees, but I'm happy to dig into the numbers to confirm this if you have them.
 

ushdadude

Level 2 Member
OK, but there is a difference between a death benefit for today,and a plan for when you are 85 years old. Bear in mind I know nothing of your current age, family, debt etc....

So while an insurance policy is to provide after 'death' are you using this plan to cover you for when you are 85, or to cover now? You started out by saying 'its time to get life insurance' but why is that? Most people think it is time when they have a family or whatnot, but you are shooting long here with this plan.

I think that is worth thinking hard about - would 20 years of term cover your needs? If so, what would it cost per month (depending on age, possibly $600-$1200 per year vs $20K....

Next up is this 5 years, then the bank pays...

Why are you borrowing from the bank at 1.5 over LIBOR if 'the bank pays?' Sounds instead like you are paying in for 15 years, and the last 10 you pay interest too? It's unclear to me.

Long story short, this plan smells like it is loaded with fees, but I'm happy to dig into the numbers to confirm this if you have them.
http://saverocity.com/forum/threads/premium-financing-for-life-insurance.88989/#post-137825

There is immediate death benefits too (to the tune of 1.5m). I was just explaining how I got to the 7m figure.
The bank gets their money from the interest on the loan. I'm not sure exactly how it works but the insured is not tied to the loan. The policy is the only collateral the bank has.
 

Matt

Administrator
Staff member
http://saverocity.com/forum/threads/premium-financing-for-life-insurance.88989/#post-137825

There is immediate death benefits too (to the tune of 1.5m). I was just explaining how I got to the 7m figure.
The bank gets their money from the interest on the loan. I'm not sure exactly how it works but the insured is not tied to the loan. The policy is the only collateral the bank has.
Here's the way I see it. You need clarity on what you want from this.

At age 30 1M of Term life could be acquired for about $40-60 per month on a 20 year term.

But the $7M is more of an estate plan. I suggest you 'unravel' the two and decide what it is you want and need from the equation.

What's the deal with the APR, it's variable right? Caps on the upside? Downside risk protection? I feel like they are showing a high ROR here and it might not be as rosey moving forward.

Do you have good retirement accounts in place, IRA's/ 401(k) etc? If you were maxed out on those I'd maybe look at this, but if you are looking at it as an alternative I'd be leaning towards a no.
 

ushdadude

Level 2 Member
Here's the way I see it. You need clarity on what you want from this.

At age 30 1M of Term life could be acquired for about $40-60 per month on a 20 year term.

But the $7M is more of an estate plan. I suggest you 'unravel' the two and decide what it is you want and need from the equation.

What's the deal with the APR, it's variable right? Caps on the upside? Downside risk protection? I feel like they are showing a high ROR here and it might not be as rosey moving forward.

Do you have good retirement accounts in place, IRA's/ 401(k) etc? If you were maxed out on those I'd maybe look at this, but if you are looking at it as an alternative I'd be leaning towards a no.
I definitely need clarity.
I'm not aiming for the $7m. I would want this as a life insurance plan with the additional benefits of an emergency fund/ retirement account.
The APR is tied to the S&P (but not necessarily invested in the S&P.) Capped at 0 and 13%. They claim an average of 8.25%
I would be looking at this as an alternative for the next 5 years. After that I would continue contributing to the more traditional retirement account vehicles.
 

Matt

Administrator
Staff member
I definitely need clarity.
I'm not aiming for the $7m. I would want this as a life insurance plan with the additional benefits of an emergency fund/ retirement account.
The APR is tied to the S&P (but not necessarily invested in the S&P.) Capped at 0 and 13%. They claim an average of 8.25%
I would be looking at this as an alternative for the next 5 years. After that I would continue contributing to the more traditional retirement account vehicles.
Yeah, I probably wouldn't want to look at this as an Emergency fund/retirement account. I'd look at Emergency Funds/Retirement accounts for that.

One thing that still isn't clear is this 5 year thing.. are you saying that you put in $100K (plus some interest) then the bank gifts you $35K per year? That is how the chart reads, and that sounds really odd... are you certain that total premiums to this account are only $100K?
 

ushdadude

Level 2 Member
Yeah, I probably wouldn't want to look at this as an Emergency fund/retirement account. I'd look at Emergency Funds/Retirement accounts for that.

One thing that still isn't clear is this 5 year thing.. are you saying that you put in $100K (plus some interest) then the bank gifts you $35K per year? That is how the chart reads, and that sounds really odd... are you certain that total premiums to this account are only $100K?
That's what is seems like. I think the banks get their money from the libor +1.5% and they have the policy as collateral. Their web site has some more information, but not much.
 

Haley

I am not a robot
Why borrow money to buy more insurance than you need?
What would a straight up 1.5 million Whole Life policy cost? Or a term life policy?

So is the projection they showed you based on 8.25%, that makes me smile, that was the number an insurance agent used to quote me rates/"returns" in the late 1980's. So glad my Dad stepped in and asked to see the 2%, 4%, and 6% numbers.
 

ushdadude

Level 2 Member
Why borrow money to buy more insurance than you need?
What would a straight up 1.5 million Whole Life policy cost? Or a term life policy?

So is the projection they showed you based on 8.25%, that makes me smile, that was the number an insurance agent used to quote me rates/"returns" in the late 1980's. So glad my Dad stepped in and asked to see the 2%, 4%, and 6% numbers.
I'm not really interested in term policies for some reason.

In this case 8.25% actually seems reasonable because it's tied to the S&P and capped at 0 and 13%. The average has been about 8.5 for the past many years, even taking 2008 into account.
 

ushdadude

Level 2 Member
Basically, the way this product was explained to me sounds too good to be true (besides for the original 100k premium). I'm just trying to figure out what I wasn't told.
 

Matt

Administrator
Staff member
I'm not really interested in term policies for some reason.

In this case 8.25% actually seems reasonable because it's tied to the S&P and capped at 0 and 13%. The average has been about 8.5 for the past many years, even taking 2008 into account.
So you don't want life insurance?

You want an investment that pays 8.5%....

But you can't get that from the market?
 

Matt

Administrator
Staff member
I want universal life insurance.
Hey, if you want Universal Life Insurance who am I to stop you? Please note that I am not arguing against you, I am trying to work with you to argue against the plan. If I lose, then at least we have pressure tested it a bit.

Another question: where do you see this Kaizen Plan being Universal Life Insurance? I see it being 'something' but I don't see reference to that. I do see reference to a 162 plan, which is for executive compensation.

The feeling I get from reading it (and its new to me, so I might be off here) is that Kaizen should be marketed to a small business/startup who wants to attract top talent but cannot afford to fund their plans. Instead they are leveraging debt to fund a plan in order to remain competitive.

If that is the case (and it feels like it) then its a perk to receive because the employer is eating the cost - it isn't a perk to take the plan on yourself and eat the cost.

Where's the details on admin fees and early cancelation fees for once you are 2 years in and realize its not as good as you thought?
 

ushdadude

Level 2 Member
Hey, if you want Universal Life Insurance who am I to stop you? Please note that I am not arguing against you, I am trying to work with you to argue against the plan. If I lose, then at least we have pressure tested it a bit.

Another question: where do you see this Kaizen Plan being Universal Life Insurance? I see it being 'something' but I don't see reference to that. I do see reference to a 162 plan, which is for executive compensation.

The feeling I get from reading it (and its new to me, so I might be off here) is that Kaizen should be marketed to a small business/startup who wants to attract top talent but cannot afford to fund their plans. Instead they are leveraging debt to fund a plan in order to remain competitive.

If that is the case (and it feels like it) then its a perk to receive because the employer is eating the cost - it isn't a perk to take the plan on yourself and eat the cost.

Where's the details on admin fees and early cancellation fees for once you are 2 years in and realize its not as good as you thought?
I appreciate that. I'm pretty naive when it comes to anything financial. I pretty much believe every salesperson. That's why I need objective eyes to look at this.

It is intended for businesses but is there any reason an individual can't participate?
I think the fees are included in the premium. The "cancellation fee" is the loss of cash value.
 

Matt

Administrator
Staff member
I appreciate that. I'm pretty naive when it comes to anything financial. I pretty much believe every salesperson. That's why I need objective eyes to look at this.

It is intended for businesses but is there any reason an individual can't participate?
I think the fees are included in the premium. The "cancellation fee" is the loss of cash value.
I'm not sure I can jump on that, but really it isn't that necessary. You and I still don't know what you want here.

It's not that it is aimed at a business - it is aimed at a business that 'cannot afford to offer this plan'. In other words, it is borrowing money to fund it. This comes with all sorts of concerns.

Borrowing money to fund investments is very high risk because the lender will not do so without collateral. What would be the impact of:

You pay in $100K over 5 years, then the market turns into a bear market with negative numbers. I understand that the losses have a floor of zero - but how does Libor+1.5% get paid if the investment is not generating income?

Do you have to pay it? Does it get deducted from your $100K Basis? What is happening here?

The fees -you need real clarity on that. How much is being baked into the premium? If they are able to take a fee of 2% but it seems 'fine' because you still make your 7M with the 8.5% average return... what happens when the average return is not 8.5%? Their fee remains fixed, your return is not, what happens to that model?

Frankly, unless I know your entire financial situation I can't really advise, but I personally would not recommend anything other that Term for people with less than the portability limit of net worth (AKA if you have under ~$5M in wealth today, double that if married, get Term).

There is too much convolution occurring in this policy and they are presenting it in a manner to get you excited. At the start of this thread you stated you wanted life insurance, but remember, life insurance is to protect your family in the event of an untimely death. These hybrid solutions are estate planning tools for people who are seeking to build elaborate plans. If you haven't already got a ton of other things going on then they likely aren't the right thing for you.
 

dlin

Level 2 Member
i have a stupid question. why would normal people buy universal life insurance? my understanding is the tax benefits are really for people w/ large estates.
 

Matt

Administrator
Staff member
i have a stupid question. why would normal people buy universal life insurance? my understanding is the tax benefits are really for people w/ large estates.
they shouldn't, but when it is sold well it seem attractive.
 

Haley

I am not a robot
That Webinar will make you feel like you are dumb to even question the product, worse than a time share pitch.

Why not a renewable term policy?

You say 'for some reason you want Universal Life' but what is that reason? I can think of three off the top of my head, 1) worries about insurability in the future 2) life insurance 'feels' like a waste of money and this 'feels' more like an investment 3) you have or anticipate a large estate.
 

ushdadude

Level 2 Member
That Webinar will make you feel like you are dumb to even question the product, worse than a time share pitch.

Why not a renewable term policy?

You say 'for some reason you want Universal Life' but what is that reason? I can think of three off the top of my head, 1) worries about insurability in the future 2) life insurance 'feels' like a waste of money and this 'feels' more like an investment 3) you have or anticipate a large estate.
It's a webinar meant for the salesperson

I would get this type of policy for the other benefits, not just for the death benefits.

I choose #2.
 
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Matt

Administrator
Staff member
I choose #2.
Yep.

The mental block with Term insurance is that it is like renting a policy, if you live it out, you lose the premiums.

What you are missing is that the building blocks of VUL/UL etc are replicated with:

Term+Investment - unnecessary fees.

The bundling of them investment appears to make it look like you aren't wasting money on Life Insurance, but in reality you are wasting more money because you are handing over more to the salesman.
 

ushdadude

Level 2 Member
Yep.

The mental block with Term insurance is that it is like renting a policy, if you live it out, you lose the premiums.

What you are missing is that the building blocks of VUL/UL etc are replicated with:

Term+Investment - unnecessary fees.

The bundling of them investment appears to make it look like you aren't wasting money on Life Insurance, but in reality you are wasting more money because you are handing over more to the salesman.
So basically I need to find an agent who has more than one product to sell.
 

Haley

I am not a robot
So basically I need to find an agent who has more than one product to sell.
Commission on term policies is maybe 10% of other products. I've never had a life insurance salesmen pitch a term policy except when they pitch adding it on to a Whole Life or Universal Life policy.

You need to tell them you want Term and be firm about it.
 

Matt

Administrator
Staff member
So basically I need to find an agent who has more than one product to sell.
As @Haley said, why would they sell you anything other than the thing that pays them the most.

What you need to do, is decide what you want. If you want Life Insurance, Term is likely what you need. If you want an Emergency Fund and Retirement Account, get them!

If you PM me your email I'd be happy to introduce you to a Fee Only planner who will talk with you for free about this, and you can discuss if you want to work together. At the moment you are in danger of being sold a lot of bad things.
 

MickiSue

Level 2 Member
My super simple rule of thumb for investment products of all kinds: If ANY part of the pitch is over my head, I don't buy until and unless it's explained to my satisfaction.

Over my head usually also means "not as amazingly wonderful as the salesperson would have me believe."

Just a thought. IF you want life insurance NOW, then it makes no sense to buy some product that may or may not perform as stated, and borrow money to do so. Life insurance s/b just that: insurance against the possibility that you are dead or disabled and unable to provide for your family. Term gives you that, at a significantly better use of your funds now and for the next 15 years.

I don't know nearly as much about insurance as Matt does. But I know this: it's not wise to put large sums of money into an investment that I don't thoroughly understand. And an investment of $500K, plus whatever else is owed that's not clear, is a sizable investment in anybody's book.
 

ushdadude

Level 2 Member
As @Haley said, why would they sell you anything other than the thing that pays them the most.

What you need to do, is decide what you want. If you want Life Insurance, Term is likely what you need. If you want an Emergency Fund and Retirement Account, get them!

If you PM me your email I'd be happy to introduce you to a Fee Only planner who will talk with you for free about this, and you can discuss if you want to work together. At the moment you are in danger of being sold a lot of bad things.
Thanks. So basically you don't like the idea of bundling them in one policy.

My cousin does traditional life insurance. I'll have a talk with him. I'll sic my aunt after him if he tries to rip me off.;)
 

Matt

Administrator
Staff member
Thanks. So basically you don't like the idea of bundling them in one policy.

My cousin does traditional life insurance. I'll have a talk with him. I'll sic my aunt after him if he tries to rip me off.;)
Yep I don't like any bundling unless I really can see what is happening. The key is what else they slip in as they bundle together, this plan is very unclear about what it is and its fees.

I believe if something is unclear, that's not an oversight.

I'll add- I wouldn't go to an insurance salesman to ask what to get- you go to a fee only planner for that.
 
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