Third-Year Financing (3YF)
HOW IT WORKS:
In this program, the client makes a fixed annual contribution for 10 years. As a hypothetical example, let's say the annual contribution is $100,000.
In policy years 1-2, the client pays 100% of a reduced annual premium (e.g., $100,000). Financing premiums does not start until policy year 3.
In this example, in years 3-10, the policy premium would be $600,000. The client's $100,000 annual contribution would be applied towards the $600,000 annual premium, and the remaining $500,000 of annual premium would be borrowed from one of our lenders, and 100% of the interest due is accrued.
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 14) will require different forms of collateral (cash, bonds, marketable securities, CDs, cash value of in-force policies, and sometimes even real estate equity). Some lenders will require collateral to be moved and housed with them, and other lenders will simply take a collateral assignment against the funds house by the current institution that manages the client's portfolio.
It is important to note that not all carriers will allow this type of design due to interest accrual, however the interest accrued in this model is not over-leveraged due to the fact that:
1. 100% of the premium in years 1-2 was paid out-of-pocket by the client.
2. The amount of premium paid out-of-pocket by the client in years 3-6 is typically much greater than the interest due/accrued in the early years.
This design is not suited for a client who "can't afford" to pay the interest due, rather it is for a client that prefers the simplicity of a fixed annual payment and doesn't mind the risk of potential negative arbitrage in some years.
This design is nearly identical to our Partial-Equity Interest Accrual (PEIA) model, however because borrowing doesn't start until year three (hence the name "Third-Year Financing"), the LTV starting in year three is much less leveraged. This results in a much lower outside collateral requirement for the client.
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