Leveraged Index Arbitrage
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 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 Arbitrage 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.