Premium Finance

As high-income earners accumulate wealth through various activities, they often look around for sources and solutions to earn, grow, and protect their wealth efficiently.

The hard work put in to generate their income took sacrifice, and there is a lot to consider before committing toward a plan. 

Looking at what some of the world’s wealthiest individuals are doing can bring clarity for a highly effective solution.
Some of the wealthiest individuals and families on this planet utilize a unique arbitrage strategy to grow their premium finance wealth. But, aside from this being a vital tool to produce wealth, it also adds the additional benefits of favorable tax treatment and protection against creditors. And let’s not forget it can be customizable and designed to fit your unique individual circumstance. 

We create a strategy that can be tailor-made for you, and that has tax and asset protection benefits!
Before we jump headfirst into exactly what premium finance entails, let’s first remind ourselves how many people have built and grown their wealth within real estate. Most of us are familiar with the concept of using leverage or borrowed money-often times from a lender or a bank- to purchase a real estate property or building. They can acquire that money at a specific interest rate with the intention to collect income or rental payments at a higher percentage per month or year at a higher rate than what they borrowed the money at. For example, say you borrow a million dollars with an interest rate of 5%, so you’re essentially paying $50,000 of interest per year. BUT you collect a rental income of $100,000 from a tenant, so at the end of the day, you have allowed your borrowed $1,000,000 to earn you $50,000 ($100,000 rent minus $50,000 interest payment.)

Over time this process can compound and be a powerful wealth too. Now, there are risks involved with making sure the real estate has to pay tenants and other things, but if executed wisely, this can significantly enhance an investor’s portfolio.
In addition to real estate, in today’s world, you can use leveraged dollars to fund permanent life insurance policies to find interest credit spreads, and this is what is known as premium financed life insurance. Permanent life insurance has some tremendous advantages when constructed correctly, so adding the premium finance component allows it to boost an individual’s wealth potential.

Qualified individuals can partner with investment banks to borrow up to 9 times the funds to pay for these premium payment policies. You can give yourself 9X the amount of dollars to be earning interest credits than what you pay out of pocket. And with the recent interest rate environments behaving the way it has, there has never been a point in history where borrowing rates are as low as they are now. If you look around at the LIBOR index and current treasury rates, the potential for arbitrage is attractive if the crediting rates return to near their historical averages. 

An individual who understands and favors permanent insurance benefits can access a higher amount of premium without committing a higher amount of their personal cash. This then gives them access to using tied up money to pursue other additional investment opportunities. This flexibility can be powerful and game-changing for people to access more and additional opportunities to commit capital.
One point that makes permanent insurance these policies attractive is someone can structure them in a way where the investment to where the money is allocated can’t return a negative. Now, credits have been near the 7% mark on average, and on occasion, you may see a credit return above 20%. But the fact that you can guarantee credit of no lower than 0% while at the same time giving yourself exposure to get a double-digit credit is a decisive advantage. Take into account that you’re utilizing borrowed money to earn credits in favorable years; you just strengthened your wealth accumulation while doing it with downside protection. 

An additional point to note about partnering with these investment banks on these policies is that they prefer to lend against insurance policies versus other asset classes. Remember the fact about these policies not being able to lose on the downside? That is a considerable strength that underwriters consider when lending money on premium finance polices. That component ensures a level of protection for the banks’ capital it lends out. With the cash value in these policies not being exposed to as crazy of volatility that other investments have, banks can feel more confident in where their capital is tied up. Then take into consideration the positive performing history of some of these long-standing insurance companies. They have proven track records of allocating premiums toward favorable sources to generate positive investment returns. This just adds a level of strength for banks when they look to underwrite strong, reputable borrowers.

The next and maybe most attractive advantage of the premium finance policy is the tax-free income potential. High net worth and high earning individuals are often in high-income tax rate brackets. The idea of being taxed on a higher percentage of earning more can be frustrating, so a number of these individuals spend time and money toward proper tax planning.

The premium finance strategy gives the owner the option to borrow against their cash value and gain access to the growth in a tax-free way. Most other investment options will have either income tax, capital gain tax, or both.
As listed above, the advantages of giving yourself flexibility and being able to allocate your capital over a wider spread— taking away the potential for downside loss, and having the ability to access funds tax-free. The premium financed life insurance strategy is favorable for high earning and high net worth individuals.

Controlling Expenses Can Be More Valuable Than Increasing Revenues
As the saying goes, “You gotta spend money to make money.” It may sound counter-intuitive, but within our businesses, we can’t avoid expenses. Payroll, supplies purchases, rent or leases, insurances, and the list goes on and on. Though there is no way to avoid expenses entirely, understanding them and planning around them could help us reduce them.
No matter what type of business you’re in, there are two types of expenses: fixed expenses and variable expenses. Fixed expenses remain unchanged based on your business’s performance. The cost is the same regardless of whether you have a rock-star year and are the most profitable you’ve ever been or whether you land flat on your face and flirt with bankruptcy.

Variable expenses, on the other hand, are directly linked to your output. Your variable costs will be higher the more you either produce or serve your clientele/customer base. To deliver more, you need to “have more,” and we all know it requires money to “have.”
Consider your fixed expenses; it may be the rent you’re paying for the building you’re occupying, it may be the software you’re using to organize customer information, the insurance premium you pay to have your business insured, maybe a subscription fee you pay each month, or the marketing fee you’re paying to have an advertisement posted somewhere. 

Now, ask yourself the following questions:
·      ARE THE FIXED EXPENSES WITHIN YOUR BUSINESS VITAL?
·      ARE THEY CONTRIBUTING TO THE SUCCESS OF YOUR BUSINESS?
·      WOULD YOUR BUSINESS FUNCTION AT THE SAME RATE IF YOU REMOVED THESES                     EXPENSES?
·      WHAT EXPENSES ARE ON AUTO-PAY THAT I’VE FORGOTTEN ABOUT?

This last question is particularly impressive. There are times we sign up for something and put it on “auto-pay” and forget about later. It’s getting taken out of our account month after month, but we have forgotten about it.

Think about that and the other questions posed. Often, with some sole business owners, there are so many items to keep track of that we forget about different aspects of our business and begin to slide in-between the cracks.
What could expenses within your business be addressed or analyzed? Could some of these expenses be re-negotiated? At times we may need to focus on decreasing expenses rather than focusing on improving revenue/profits/sales.

Let us help you prepare for your future today

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