Are you considering Premium Finance with life insurance? We delve into the world of Premium Finance with Dan Wachs from Perpetual Wealth Management. We cover everything you need to know about this financial strategy, from its basic structure to the key considerations and potential risks involved.
Key Points:
➡️ Understanding Premium Finance: Learn how high-net-worth individuals can leverage third-party lenders to fund their insurance policies while keeping their investments intact.
➡️ Who is a Fit for Premium Finance? Discover the specific criteria, including a net worth of $5 million or more and an income of $250,000 or higher, that make someone an ideal candidate for Premium Finance.
➡️ The Role of Liquidity: Explore the importance of liquidity and collateral in Premium Finance, and how it impacts the strategy’s effectiveness.
➡️ Risks Associated with Premium Finance: Gain insights into the potential risks, including interest rate fluctuations, policy performance, and the choice of lenders, that need to be carefully considered.
➡️ Age and Time Horizon: Understand the significance of age and time horizon when determining the suitability of Premium Finance, and how they affect the long-term success of the strategy.
If you’re considering Premium Finance as a financial strategy or want expert advice on optimizing your approach, we hope this provides valuable insights to help you make informed decisions. Reach out to us at the links above to explore your Premium Finance options further. Don’t miss out on the opportunity to harness the potential of Premium Finance for your financial goals. Subscribe for more educational content!
Full Transcript (Note: It’s not perfect):
Matthew Decker: [00:00:00] So today, we’re talking about premium finance with 1 of my good friends, Dan Wachs of Perpetual Wealth Management. Thanks for having me, man. Absolutely. Dan and I have known each other for a while now, and we’ve done several premium finance deals together. And I thought it would be an awesome opportunity to get him onto the channel and just ask him some general have questions about premium finance, what it is who it’s a fit for, and really just how it works.
So, Dan, in in your own words, what is just the basic structure of premium finance with life insurance?
Dan Wachs: It’s a good question because I think people think of it and it they think it’s It’s very complicated. But in reality, man, it’s really just a way for high net worth people to fund their insurance policies, but instead of paying out of pocket, what they’re doing is actually going to a third party lender To pay those premiums for them while they’re able then to keep their money invested in their investments, in their business, Other things. So it’s just a way to utilize other [00:01:00] people’s money to fund an insurance
Matthew Decker: policy. So what type of person would this be a fit for in terms of using other people’s money as you put it, you know, financing your policy from a bank.
Who who is this a fit for, and and what type of person is it
Dan Wachs: attractive to? Really good question. I think that it’s a fit for have probably less than 2 percent of the population. And what I mean by that is that so it is a limited use. I mean, because people have to qualify 2 ways, medically And financially, and what I mean by financially, that’s the biggest thing.
The the net worth usually want to be around 5000000 or above at a minimum. They have good income 2 50 or higher. And, really, that type of client is 1 that you’d say is choosing the have strategy to do the financing through a lender, but is the person that’s capable of writing the premium check were the premium amount, but they’re choosing a different way to fund the policy. So limited application, 2 percent of population, [00:02:00] you have a high net worth type of situation. And and that can be, you know, a lot of them are business owners, doctors, attorneys, professional athletes, But those are the people that are going to be the ones that qualify for this
Matthew Decker: Okay.
Strategy. So we’re talking high net worth Correct. High income. And and I would assume that there’s an element of probably needing some liquid have collateral or or being relatively liquid to make the strategy easier to work because there is going to be a collateral component in most cases as it results are as it pertains to premium finance. So so what type of liquidity would we be looking for for most types of applications?
Dan Wachs: Yeah. So I think that the the critical thing with with financing and is usually the barrier to people doing it is the fact that In the early years of an insurance transaction, the cash value is not enough to sustain what is owed to the bank as What’s been borrowed. [00:03:00] So in early years, we have a component that we need some outside collateral in the form of investments, cash. I use a lot with real estate guys, I use letters of credit that are a way that they can post that without using their own assets. But, you know, it’s a really good point because these people do they can’t have no liquidity in order to do it because the collateral is needed.
And and What’s nice about that is if I’m doing a real estate transaction, you know, I’m I’m supposed to put 20 percent down to buy a property. Right? So that’s putting that money down. This is kind of putting the money on the side and they’re gonna get that returned to them and the policy is gonna be able to grow and then sustain the deal for them. But Yeah.
So there is liquidity needed and that really is gonna depend on the size of how much they’re borrowing and how much is available. And and the way the lenders do it is they say, okay. If you were to cash out the policy, how much is available? And that difference is what we need [00:04:00] to post as collateral. Understood.
Matthew Decker: And so with these policies being life insurance policies and having surrender values in those early years Mhmm. That’s where that kinda we would call it gap collateral. Correct. That’s where that comes into play. The value of the total loan minus the value of the policy after surrender charges because that’s how the bank is going to look at Right.
The value of the policy after surrender charges. That is correct. And whatever is needed there would be needed as collateral. So okay. Well, what are the risks involved with premium finance?
It seems to me that there’s a lot of variables that are, are involved over and above just your standard, you know, life insurance policy purchase. So this wouldn’t be, you know, market performance. That’s gonna apply to have any type of policy you wanna buy but specifically with premium finance, what are the risks
Dan Wachs: that are involved? I think because you’re using a third party lender and it is It is borrowing money. So number 1 is that the lender has to be paid back.
Right. So at some point in time So this is not a short term [00:05:00] transaction. We’re looking at something that’s gonna be 12, 13, 15 years of of holding it. So The risk that come into mind are interest rate risk as we’re seeing right now. Mhmm.
You know, interest rates going up 13 times in 1 year, not normal, never happened before. But but that’s the risk that’s 1 risk that people realized in these strategies. So being able to design something that’s flexible to work around that is super important. The second thing is policy performance. You know, does the policy have strategies internally that can earn a decent rate of return that we can earn and be able to pay the lender back.
That’s super important. So those 2 risks, I think, You know, client situation, you know, is is what they’re doing work wise, earnings wise, is that pretty stable? I mean, we don’t wanna have someone that had, like, you know, a home run thing happen, and then this is a good strategy for them because we have to have them to be able to be are [00:06:00] pretty stable in order to do it. But then for me personally is when I design it, designing it have To say, okay. This is a part of their overall plan, not, hey.
This is the only strategy they’re gonna do, so let’s put all their money into it. I mean, that’s probably that’s a big risk. And that’s more of not a client risk. That’s a risk of who you’re working with. You know?
Because I’ve seen some crazy designs that, you know, I’m not I’m not sure that the person could have really sustain that or afford it. Yep. So So
Matthew Decker: what I’m hearing you say, the risks being would be in the early years Mhmm. Number 1, there’s not much liquidity, and it’s a long term transaction. Correct.
10 to 15 years. Mhmm. Because of that, you’re gonna need to have stable income, stable assets because it isn’t a short term play. Right. So this is not something that you get in and you get out in year 3 Right.
Or year 4 or year 5. Right. And then, of course, you know, the structure of the policy matters. You know, the company that you’re working [00:07:00] with matters. The lender matters.
That’s a
Dan Wachs: let me let me touch on that, Matt, because I think that’s important because there’s a lot of different lenders that say we’ll do this premium financing. I like to work with lenders that know how to do this, that have been doing it for a while, that, you know, have no prepayment penalties, have no origination Fees are very limited on those. I’ve seen lenders that work in the private equity markets that are trying to raise have capital to fund their strategies. That is that makes me nervous. So I think that you have to have solid players, and it’s not like you go down to your bank In in in your town and say, you know, I wanna do premium financing and the lender’s gonna know what that means.
Right. Right? So we really wanna work with lenders that understand how insurance policies work outside of, you know, of lending us the money, but I want banks that have have a lot of capital, and I’m not worrying about if they’re gonna fund my transactions because that was another risk. I’ve seen lenders get out of the market. I’ve [00:08:00] seen lenders that were offering Fixed rates and when interest rates go up, you know, that these rates, you know, when they borrow money from the Fed to fund these deals, that they’re borrowing at a higher cost than what the have clients paying.
So there’s there’s a lot to that, but I mean so we have to really understand the lenders we’re working with. So we have a handful of them, And depending on what the client needs, that’s when we’re really gonna decide, you know, who who we’re working with, what lender. But but mainly, they have to be stable as a lender.
Matthew Decker: Yep. Alright.
Let’s talk about age of clientele. Does it matter how old you are? What’s more important, Morton, how old you are or your time horizon for the transaction?
Dan Wachs: That’s a super good question. I mean, obviously, Actually in insurance, the younger someone is the better.
Right. Right? I mean but how many people actually when they’re younger are worth 5000000? Right. So that’s But, of course, the younger someone is and and really the the the value, man, is is when when a person’s younger, [00:09:00] It’s really they get more out of it from, you know, they’re gonna live longer.
So they have more time to enjoy the benefits of what we’re doing, whether that’s tax free income or, you know, estate planning, you know, growing the death benefit. But But I can make the numbers work for someone who’s, you know, 35, someone who’s 55. It’s just that That 55 year old’s probably gonna pass on before the 35 year old, and then they’re not gonna have the same amount of benefits. But, obviously, the older someone gets, I mean, it’s sometimes really difficult to to make the numbers work internally for the policy And feel confident that I’m gonna be able to pay the bank back and still provide these benefits for the clients. So and because insurance is based on if if they’re older, their internal costs are gonna be more expensive.
Right? I mean, so that’s the problem. Is there a
Matthew Decker: point at which it wouldn’t work from an age standpoint. Yeah.
Dan Wachs: And [00:10:00] and it really is is what I do personally is is I if a person has an adviser, I’ll run the numbers based on my models for that person.
And if I can get the numbers to work, I may proceed, but, you know, a lot of my competitors will proceed no matter what. No matter what. No matter what happens. So, you know, I if I if I don’t feel I can pay the lender back, I’m probably walking away in the structure. And that usually anytime in your high sixties, seventies year old, like, it gets a little bit more challenging.
65
Matthew Decker: plus is typically what I’ve seen where it starts to get pretty difficult. Are challenging. Yeah. Very challenging.
Dan Wachs: Now let let me make 1 point is that it’s challenging if I’m taking the money out of the policy to pay the lender back.
Right. Now if they have other strategies, you know, grant or trust that are gonna fund some of this stuff or you know real estate per you know sales of real estate, And I can pay the lender back, then then it could work. Right? But but but the client in advance, we have to be okay with that’s what we’re gonna do. Yeah.
Need to know [00:11:00] that upfront. We need to know Or they we know that that’s gonna be part of the plan when that happens. Yeah. You know? Then it could work.
Yep. So
Matthew Decker: if if the client has dollars have side of the insurance transaction Mhmm. That they are comfortable with using to help the policy pay the lender back at some point. It can work at older ages, but, obviously, that’s have something that needs to be worked through before you get into the transaction itself. Is that what you’re saying?
Dan Wachs: Yeah. And sometimes, man, I mean, this the Ultimate exit strategy is gonna be the passing of the client. Right? I mean and then it works. Right.
Right. It works. It might not be as great, but then but the point is is that I don’t know when that’s gonna happen, and I don’t wanna rely on it. So when I say the numbers probably don’t work, it’s because of the fact that I’m trying to take the money out of the policy Understood. To stay the bank back.
Understood.
Matthew Decker: So if I’m just recapping, you know, premium finance in general we’re looking for about 2 percent of the population this is gonna qualify for. Mhmm. In terms of a net worth standpoint, 5000000 plus. In terms of [00:12:00] an income have a standpoint, 2 50 plus you have to be young enough to have time to pay the lender back.
It’s not a short term transaction. We’re talking 10, maybe 15, have seen 20 years Mhmm. That you’re in this policy. And so I would say that this is probably 1 of the worst have short term vehicles in the world. Mhmm.
It’s 1 of the worst short term die. Unless you die. Yeah. That’s right. But nobody’s getting into this to die.
Yeah. Then it’s the greatest. Yep. Greatest have short term vehicle if you die. Yeah.
Worst short term vehicle if you live. Okay. That’s true. But you’re in it for the long haul. Mhmm.
And you gotta have a stable source of income, stable source of assets. You need some liquid collateral. You need time to make it work. And if all those things line up, premium finance can be a beautiful strategy, but there are risks involved. Mhmm.
And the risks we discussed would be the risk of the lender maybe are doing something different in the future or not being able to borrow at rates they said they could borrow at. Policy performance risk is 1. How the policy is designed is another 1. Mhmm. All those should be carefully considered.
So I would just say, [00:13:00] if you are considering a premium finance policy or you have a premium finance design, you should have an expert look that over because this can be 1 of the best things you ever get into, And it can also be 1 of the worst things you ever get into if it’s done poorly. Dan and I are both experts in this space. And so if you would like a second opinion, you should reach out to us. You can go to my website leveraged w m dot com. Up at the top, you’ll see contact us.
You can book a meeting with us, and we can chat about whatever it is that you may be considering in the premium finance realm. And, Dan, go ahead and give a shout out to your website as well so people can find you.
Dan Wachs: It’s perpetualwm.Com. So perpetual wealth management perpetualwm.com. Perfect.
Thanks Matt.
Matthew Decker: Absolutely. We’ll be back with more on premium finance and diving into some of the have to fix about where these policies really may fit with some specific applications.
Till next time. Take care.