Life Insurance Financing is very Similar to Real Estate Financing

1. Structured Life Insurance
more similar than you think…
We Changed the Landscape of Purchasing Life Insurance

2. LIFE INSURANCE PREMIUM FINANCING (1.1)
More similar than you think…
By Dean J. De Marco
Over the past two decades of
navigating the world of life
insurance premium financing I
continue to recognize a divide
between the advisor of the high
net-worth client and the client.
This divide may exist because of a
minimal understanding of the
lending facility that is used to
borrow premiums to purchase a
life insurance policy. I have found
the advisors generally wish to set
expectations that a life insurance
inspired loan should somehow
perform differently than
commonly accepted lending
arrangements, of which the client
is familiar and comfortable with.
I find when you simply explain
the basic fundamentals of the
loan structure the client soon
realizes the similarities of life
insurance premium financing and
other credit facilities. Although the
specific nuances may vary
because of customization, the
core components are similar.
Let’s briefly compare life
insurance premium financing to
the most commonly used lending
arrangement; a mortgage.
LTV (loan-to-value), the
backbone of the credit. Essentially
both a mortgage loan and a life
insurance premium loan are
considered asset backed loans.
The loan underwriting evaluates
the client’s credit worthiness and
the ability to perform under the
terms of the loan which
commences with extending credit
against the estimated value of
the underlining asset. A
mortgaged property begins with
the assessment of its market
value. It is important to
understand that this assessment is
highly subjective and is usually
dependent on a current
appraisal. Once the property’s
value is established the lender will
determine an advance rate; the
amount they will lend against the
property. The advance rate is
based on various market
conditions and the client’s
financial condition. As a result, the
lender will require the client to
infuse equity into the
arrangement in the form of a
down payment.
With regards to a life insurance
premium financing loan the
lender utilizes the LTV concept as
well. The asset value of the
underlining asset (policy) is the
policy’s cash surrender value
(“CSV”). Based on the specifics of
the policy being financed, the
CSV may be discounted similar to
a real estate loan. However, the
discounts on the CSV are less than
those found in the real estate
mortgage. In lieu of a down
payment the life insurance loan
will require collateral which will be
pledged as its form of equity.
Many fail to realize the life
insurance premium loan finances
100% of the acquired asset. Under
the life insurance premium loan
the collateral pledged will not be
SUCCESSION CAPITAL ALLIANCE
LIFE INSURANCE
LEVERAGE SHOULD BE
CONSIDERED AND
RESPECTED NOT UNLIKE
ANY OTHER FORM OF
DEBT/LENDING.

3. S U C C E S S I O N C A P I T A L A L L I A N C E
disrupted and continue to be
deployed by the client hopefully
provides the desired return on
investment. Conversely, the down
payment is transferred to the
lender in cash, therefore
foregoing the opportunity future
appreciation. In fact, the
monetization of the down
payment may also subject the
client to income tax.
Payments, in terms of both
loan facilities, they require a
payment schedule. The mortgage
generally amortizes the loan over
a stated period of time. These
payments include principal and
interest and may also include
taxes and insurance. The life
insurance loan payments are
designed generally as interest
only payments. In fact, for many
of our client’s we may structure
specific principal reduction
payments which may enhance
the returns of the transaction and
reduce some of the risks to the
client. I witness too many advisors
attempting to eliminate the
interest payment requirement as
an effort to “sell” the client to
what appears to be an infinite
yield on the death benefit.
However, if you apply a sensitivity
analysis, you will find the risk
adjusted yield will be much less
had the client simply paid the
interest. Again, look towards
other lending facilities as a
benchmark, they all require
payments.
The Asset, I am not going to
compare and contrast the
intrinsic values of each asset; that
is a topic for a future article.
Realistically, our affluent client’s
possess both assets and both
leveraged. I would like to point
out the life insurance policy’s CSV
may eventually grow beyond the
outstanding loan, even though
the non-amortized interest
payments were paid to cover the
debt service. An important fact
often assumed and over looked, is
the policy’s principal objective is
to provide protection and liquidity
to mitigate anticipated risks to the
client.
Retiring the loan, the average
mortgage duration ranges
between 7 and 10 years. The
reason, the asset was sold and
the debt was satisfied. If the asset
was to be held for a longer period
of time, the principal portion of
the payments would eventually
reduce the loan to zero.
Although a much smaller
sample size, an interesting
observation we find is the
average duration of life insurance
loans range between 7 and 10
years as well. A number of factors
determine the loan payoff.
Unfortunately, the most obvious is
the death benefit is used to retire
the debt. We also have found
that based on the client’s family
and business planning, loans are
reduced or completely paid off
through client’s cash flow. A
unique aspect of the life
insurance asset is the CSV may
actually be utilized to assist in the
retiring of the debt without losing
control, ownership, or benefits of
the policy.
Walk away, let me just say, as
a former lender and current
advisor I just cringe when I hear
an advisor utter the words, “well
the client could just walk away.”
Usually, the context is the advisor’s
attempt to convince me a life
insurance loan is more onerous
than a mortgage. Well, I wonder
what a client would say, if they
overheard an advisor simply
mention that their client has no
financial loss if they “walked
away” from their mortgage, or
any loan for that matter.
Unfortunately we have recently
witnessed far too often the
impact of a “walking away”
solution to a life insurance loan.
The advisors do not appear to
recognize the value of the down
payment, the payments made by
the client along with the
opportunity cost of the cash flow
and the assets future value. Need
I mention, but there may be a
potential phantom income tax
liability.
While, life insurance loans
require guarantees by the client,
the core foundation is the LTV,
which is supported by cash
surrender value (liquidity) of the
policy. Yes, if for some reason the
client elected to walk away, the
loan will be satisfied, not
defaulted. Depending on the

4. S U C C E S S I O N C A P I T A L A L L I A N C E
point in which a client decided to
take their stroll, the CSV may be
greater than the loan, thus
resulting in satisfying the debt and
potentially walking away with the
remaining value.
Summary, life insurance
premium financing should be
considered and respected not
unlike any other form of
debt/lending. It should not be
minimized or sold as the reason to
enter into a life insurance
transaction. It should be
considered as an effective and
financially viable alternative
method to acquiring the needed
life insurance policy. The client
must be fully informed on the risks
and rewards of the transaction.
The strategy and design must be
developed with the client and
advisory team to assure the
structure compliments the client’s
goals and objectives. Most
importantly, like a successful
mortgage, it should be offered as
an alternative method to pay for
the chosen asset.
With the case of life insurance,
the asset, of which provides
liquidity and security for families,
businesses and for philanthropic
purposes.
Dean De Marco is a pioneer and twenty year veteran in the highly specialized life insurance financing industry.
Dean has hands on experiences in lending & direct customer consultation focused on providing results oriented
leveraged life insurance solutions.
Dean manages both the NYC & Scottsdale, AZ offices. Succession Capital Alliance, known as the “gold standard”
of the life insurance financing market, placing more than $36 billion of insurance protection with a loan portfolio
exceeding $3.8 billion.