Permanent life insurance is about much more than the premium amount and the death benefit. It can also form the basis of prudent lending strategies for your clients.
Previously in this series, we talked about how these insurance contracts generate a cash surrender value, which policyholders can use to secure a line of credit. That’s one approach. There’s another that leverages permanent insurance in a different way, this time focusing on cash flow.
It’s called an Immediate Financing Arrangement (IFA). Advisors can introduce it as a means to fill a client’s permanent life insurance needs, while minimally impacting the cash flow of their business. For clients who want life insurance protection and a cash flow solution, this approach can be the best of both worlds.
An IFA targets high-net-worth clients who may have substantial life insurance needs and therefore significant premiums. These are clients who can afford to pay the premiums on a permanent life insurance contract but prefer unhindered access to their cash flow. Typically, once clients pay the premiums out of their own resources, a lot of money is no longer accessible. With an IFA, once the policy is in force, they can borrow back up to 100% of the premium amount each year.
Clients can use that cash as they see fit, particularly for their business or other investment purposes. All they have to do is pay interest on the IFA advance each month. The IFA is separate and apart from the life insurance contract itself, i.e., the interest rate is not linked to the insurance contract.
From a cash flow perspective, the impact of large insurance premiums is replaced by the much smaller interest amount. Moreover, if a client uses these funds in any way that generates income, they can often deduct the interest. So there can be significant tax advantages* to go along with some of the tax deductibility features of the assigned life insurance contract itself.
As for repaying the IFA advance, that remains fully open. When the policyholder passes away, the outstanding loan is repaid out of the death benefit, and the remaining proceeds are paid to the beneficiaries.
Our minimum eligibility is $30,000 a year in premiums (most lenders have a $200,000 minimum). While our average case size involves premiums of just over $200,000 a year, we have many cases in the $50,000–$100,000 range.
The right solution at the right time
Manulife Bank has a long and successful history with IFAs, putting our first one together in 1995. IFAs are a core business for Manulife Bank, so we assign our most experienced and knowledgeable corporate lenders to work on them on behalf of your clients.
We can help you put together an IFA. It typically involves a case discovery (which includes meeting with the client, their accountant and lawyer) and issuing a discussion paper based on the agreed-upon structure and then proceeding to Manulife Bank underwriting.
Your value as an advisor is offering the right solution at the right time. Here, the insurance recommendation takes priority. Sometimes clients will balk at the cost, thinking about other productive things they’d rather do with those premium amounts. That reasoning might seem sound, but it can mean they might forego the insurance or look at a smaller insurance coverage amount with its lower premium.
As their advisor, you’re always acting in your clients’ best interests. This is where the IFA comes into play. You can satisfy clients in both their insurance and cash flow needs.
In the end, clients know they’re protected and are free to take advantage of an IFA for any number of investment opportunities. We’ll talk about some of those in the next instalment of this series.