Using an Interest-Free Catch-up to Free Up Client Assets
The affluent often became wealthy as a result of their own hard work, owning a business, creating a real estate empire and the like. These individuals have a track record of generating an attractive return on their assets. Unfortunately, that makes them reluctant to commit large amounts of capital to a life insurance strategy. Fortunately, there are strategies that can allow these clients to move forward while reducing their cash outlay for the proposed insurance position.
Typically, affluent clients seeking to reduce their premium outlay end up being introduced to premium finance. While it has its place, premium finance does introduce additional risks that these clients may not want to take on.
That’s where a bit of creativity can find a middle ground, reducing the premium commitment the client has to make without introducing new risks that may make them uncomfortable moving forward. In this case, we use an interest-free catch-up provision to design a solution that delivers a 35% reduction in the client’s initial outlay.
This allows the client to defer any additional outlay for as many as twenty years on a guaranteed basis, leaving the balance of their available capital unencumbered and available for allocation to the kind of opportunities that allowed them to create their wealth in the first place.
There is an alternative to paying the catchup premium beginning in year 20. A quick look at the current values shows the possibility of $11.6M in cash value at policy year 19. With the clients now age 88 and 85, a more thoughtful approach to how much premium to pay, if any, based on their health and likely mortality is certainly appropriate.
Taking this approach will minimize their net outlay obviously, but the impact on the actual IRR on the death benefit is tremendous. If no further premiums are paid, the cash value continues to grow and at year 25, the younger insured’s age 90, the IRR on death benefit is a robust tax-free 5.57%.
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