Different Programs for Different Needs

At Lionsmark Capital, we have several different premium financing programs to accommodate different client needs.  Some are death benefit-focused solutions for estate/legacy planning, and some are accumulation-focused for asset diversification and retirement income supplement planning. 

Our proprietary software produces transparent comparisons between various premium financing life insurance programs, non-financed life insurance products, and non-insurance based investments.  Our software can deconstruct the policy’s crediting methods, charges, and financing designs, and backtest each program wherein we can model how volatility and a poor sequence of returns would affect each policy design, including:

    *The last 40 years of the S&P 500 historical returns

    *The last 20 years of the S&P 500 historical returns (run back-to-back, creating a hypothetical 40-year period)

    *The “Sandwich” (2000-2009, then last 20 years, then 2000-2009 again)

Again, we have several different programs, depending on the client’s needs and desired outcome.

Below is a brief description of some of our programs.

OMAKASE PENSION ALTERNATIVETM 

ACCUMULATION & INCOME-FOCUSED

THE PURPOSE

The primary purpose of this program is for accumulation and future income drawdowns.  It is what we refer to as Responsible Leverage, not a free insurance or a magical income in the clouds type of program.  However, it can also be used for death benefit-focused estate planning purposes.  Mathematically speaking, our Leveraged Index ArbitrageTM program is better suited for estate planning than the Omakase Pension AlternativeTM, however if your client is currently looking at a non-financed 10-pay Whole Life or IUL to fund Generation II’s estate tax liability, and they want something simple and fixed, and the idea of leverage scares them, this conservative partial-financing solution will outperform its non-financed counterparts in most cases (assuming the client is under the age of 73).

HOW IT WORKS

This program incorporates the simplicity of a level, fixed, annual contribution for a period of 10 years, with a third-party loan payoff in year 11.  We also have a 10-year fixed borrowing rate option as well, wherein the policy value is the sole collateral, with no additional outside collateral required.  When stress-tested in our proprietary software, typically this design would require eight 0% index credits in the first eight years  of the policy to trigger an additional outside collateral requirement.  As long as the policy value is a minimum of 105% of the outstanding loan balance, the client does not need to sign a personal guaranty on the loan, which can be very appealing to most clients.

WHY IT WORKS

The client pays the first two years of policy premium out-of-pocket.  Borrowing starts in policy year three, however the premium is not 100% financed in years 3-10.  We have built an algorithm that calculates how much premium should be borrowed, and how much premium should be paid out-of-pocket by the client.  Our proprietary algorithm calculates this ratio to accommodate a fixed client outlay. 

For example, if the client annual outlay is $100,000 for 10 years, in years 1-2, that $100,000 pays the entire premium.  Then in year 3, some of that $100,000 annual budget will pay the interest on the newly borrowed premium, and some of that $100,000 will pay non-financed policy premium.  As time goes on, and more premium is borrowed each year, more of that $100,000 annual budget will be applied to the increasing interest (due to the increasing cumulative loan as more premiums are borrowed), and less of that $100,000 annual budget will go towards non-financed premium.

There is no interest accrued in the Omakase program whatsoever.

We can compare this to a non-financed 10-pay policy, and due to our 10-year fixed borrowing rate option, this comparison is a true apples-to-apples comparison, with the only variable in both the non-financed policy and the Omakase program being the policy performance.

CARRIERS WE LIKE FOR THIS PROGRAM

In alphabetical order, Allianz, Global Atlantic, John Hancock, National Life Group, Pacific Life, and Penn Mutual all work very well with the Omakase Pension AlternativeTM program.  Minimum net worth requirements vary with each carrier.  Below are the parameters:

$500,000 Minimum Net Worth & $200,000 Income (or $400,000 Income & No Net Worth Requirement):

Allianz

$2,500,000 Minimum Net Worth & $200,000 Income

National Life Group

$5,000,000 Minimum Net Worth:

Global Atlantic, John Hancock, and Pacific Life

$7,500,000 Minimum Net Worth:

Penn Mutual

LEVERAGED INDEX ARBITRAGETM 

DEATH BENEFIT & ESTATE PLANNING-FOCUSED

THE PURPOSE

The are two primary uses of this program:

    1. To provide income replacement to the spouse of the insured upon the insured’s death.

    2. To provide the funds needed by Generation II to pay the estate taxes due upon Generation I’s death.

This program can also be used as a retirement supplement, however our Omakase Pension AlternativeTM program is better suited for retirement income due to its earlier third-party loan payoff and greater amount of equity premiums resulting in a lesser loan payoff amount.

HOW IT WORKS

In this program, the client pays the first-year premium out-of-pocket.  Starting in year two, the client begins borrowing premiums and paying the full interest out-of-pocket.  Interest is paid each year until the third-party loan is paid off, typically in policy year 16.  If it is death benefit-focused, we will typically use a withdrawal under basis to execute the third-party loan payoff.

As long as the policy value is a minimum of 105% of the outstanding loan balance, the client does not need to sign a personal guaranty on the loan, which can be very appealing to most clients.

WHY IT WORKS

There is nothing wrong with a 100% leveraged premium financing program, as we also offer two additional programs that are 100% financed (described below).  The challenge however is that often times, clients get Collateral Amnesia.  After 5, 6 or 7 years into the program, they will have forgotten about how the outside collateral requirement is calculated.  So if the policy performs less than was originally illustrated, and policy values are less that expected, there will be a greater collateral requirement.  If you’ve ever had to deliver this bad news to a client at policy anniversary, you know what I’m talking about.  Or if they have posted a securities account as collateral, and a market crash occurs, they may have to find additional sources of liquid assets to post as additional collateral.

What makes our our Leveraged Index ArbitrageTM program so client-friendly is that the collateral is posted inside the policy (in the form of first-year premium).  In most cases, it completely eliminates the need for the client to worry about collateral being a variable that needs to be managed each year.  For the advisor, it also substantially mitigates the liability of having to apologetically inform the client that they need to post additional collateral should policy values be further underwater than expected.

CARRIERS WE LIKE FOR THIS PROGRAM

In alphabetical order, Allianz, Global Atlantic, John Hancock, National Life Group, Nationwide, Pacific Life, Penn Mutual, Securian and Zurich all work very well with the Leveraged Index ArbitrageTM program.

FIRST-DOLLAR FINANCING

DEATH BENEFIT & ESTATE PLANNING-FOCUSED

THE PURPOSE

The are two primary uses of this program:

    1. To provide income replacement to the spouse of the insured upon the insured’s death.

    2. To provide the funds needed by Generation II to pay the estate taxes due upon Generation I’s death.

HOW IT WORKS

In this program, the client begins borrowing premiums and paying the full interest out-of-pocket starting in year one.  Interest is paid each year until the third-party loan is paid off, typically in policy year 16.  If it is death benefit-focused, we will typically use a withdrawal under basis to executed the third-party loan payoff.

There will always be an outside collateral requirement in this program, and the client is required to sign a personal guaranty on the loan.  Different lenders on our platform (we currently have 12) will require different forms of collateral.  Some will require collateral to be housed with them, whether they be marketable securities or cash, and other lenders will take a collateral assignment against the funds that remain with another institution.  Loan-To-Value (LTV) requirements will vary based on the type and source of collateral.  One of our lenders will even allow certain types of real estate to be used as collateral (with a 50%-65% LTV requirement) and a maximum of $10MM cumulative loan amounts.

WHY IT WORKS

For clients that want to maximize leverage, as long as they don’t mind the collateral requirement being a variable (and an annual moving target), our First-Dollar Financing program is great.  If they have in-force Whole Life or IUL policies with substantial cash value, they may potentially use these policy values as collateral as well.

If you are jointly working with an AUM advisor, they will undoubtedly like the stickiness this program creates if you are using their AUM account as collateral because it freezes the portability of the account, ensuring that the client doesn’t liquidate prior to the third-party loan payoff.

CARRIERS WE LIKE FOR THIS PROGRAM

In alphabetical order, Allianz, Global Atlantic, John Hancock, National Life Group, Nationwide, Pacific Life, Penn Mutual, Securian and Zurich all work very well with the First Dollar Financing program.

PARTIAL INTEREST ACCRUAL

DEATH BENEFIT & ESTATE PLANNING-FOCUSED

THE PURPOSE

There are two primary uses of this program:

    1. To provide a death benefit to the spouse of the insured upon the insured’s death.

    2. To provide the funds needed by Generation II to pay the estate taxes due upon Generation I’s death.

HOW IT WORKS

In this program, we use a 10-pay IUL wherein the client pays a fixed outlay in years 1-20 in an amount similar to the annual premium expense on a 20-year term policy.  In years 1-10, typically about 10% of the actual IUL premium is paid by the client (the fixed annual budget that is equal to the 20-year term premiums).  The remaining policy premium is financed and the interest is accrued.  This is not a “free insurance program,” for the client is paying approximately 10% of the annual premium out-of-pocket via the fixed budget.

In years 11-20 (after the 10-pay policy premium funding has ended), the client continues to pay the same fixed annual outlay, however this outlay is used to pay down the principal loan balance.  The interest due on the principal loan balance is accrued.

There will always be an outside collateral requirement in this program (typically for the first 8-10 years of the third party loan), and the client is required to sign a personal guaranty on the loan.  Different lenders on our platform will require different forms of collateral.  Some will require liquid collateral to be housed with them, whether such collateral be marketable securities or cash, and other lenders will take a collateral assignment against the funds that remain with another institution or surrender values of another in-force policy. 

Loan-To-Value (LTV) requirements will vary based on the type and source of collateral.  When solely using policy values and cash as collateral, most of our lenders will require a 90%-95% LTV.  However, one of our lenders will even allow certain types of real estate to be used as collateral (with a 50%-65% LTV requirement) and a maximum of a $10MM cumulative loan amount.

WHEN IT WORKS

There is certainly an element of risk in any interest accrual program due to the compounding debt.  Though we are not a fan of compound debt, there are some unique circumstances in which this PARTIAL interest accrual strategy can make sense.

Typically, the client needs to have a minimum net worth of $25,000,000.  This partial accrual strategy may be suitable for the client if they have one or more of the following perspectives:

    1. They don’t mind the risk of potential negative interest arbitrage

    2. They have the money to pay the full interest, but would rather deploy those funds elsewhere

    3. They have the net worth to be able to pay off the third party lender at any time with outside funds

We backtest this program in our proprietary software to show the client when the compounded debt becomes unsustainable by the policy values alone (especially during times of volatility and hyper-borrowing rate increases).  As long as they understand this risk, and assuming their net worth and financial situation deems this a suitable strategy, and assuming their financial advisors agree with the suitability of this strategy, we can facilitate this program.

We do NOT endorse using any interest accrual strategy for the purpose of retirement income drawdowns.  Mathematically speaking, there is far too thin a margin between the increasing compounding debt during the accrual years and the compounding growth of the policy value, which creates too little net policy value in the event of poor index performance.

We have backtested and stress-tested TONS of these types of programs (promoted by our competitors) within our proprietary software, and in almost every single case, the strategy falls apart when exposed to volatility.

CARRIERS WE LIKE FOR THIS PROGRAM

The only carriers that universally accept interest accrual premium financing programs are Allianz, John Hancock and  National Life Group.  Other carriers may approve this type of program on a case-by-case basis, of which we may ask for exceptions and formal carrier approval.  

It is important to note that we will only proceed with this type of arrangement if we have:

     1.  Formal and official carrier approval from their advanced markets counsel.

     2.  Our Memorandum Of Understanding form signed by the client, acknowledging the risks

             associated with compounding debt and interest accrual.

     3.  Backtested and stress-tested mathematical proof that the model works under volatile

             periods that experience a poor sequence of returns.

In any type of interest accrual request we receive from a client or an advisor, we first backtest and stress-test the design.  Then, if we are comfortable with that specific case and that specific design, we will transparently ask for pre-approval from the carrier’s Advanced Markets team.  If everyone is onboard and unanimously agrees that the program is suitable for the client, we will facilitate the lending program.

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OMAKASE PENSION ALTERNATIVETM