Cash flow can be the key to financial success. Your clients want accessible cash to put back into their business, increase their investments, purchase real estate or any other number of purposes.
That’s why an Immediate Financing Arrangement (IFA) can sometimes seem too good to be true. While not a mass market strategy, an IFA can be an excellent solution for the right client. 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.
The result? That cash is no longer tied up in the premiums. Clients can use it as they see fit. Moreover, they experience only a modest net cash outflow, as they just have to pay the annual interest costs on the IFA advance.
Some clients can have a hard time grasping the concept, as can their accountants and lawyers. So it’s important for advisors to present this financial approach in the right way.
Put life insurance needs first
Start with identifying candidates for an IFA. This strategy isn’t for everyone. It’s geared to affluent clients, those who can afford the insurance premiums without the loan. Our minimum eligibility is $30,000 a year in premiums over 10 years (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.
How should you position an IFA? The life insurance need is paramount. Talk about an IFA as a means to get your client the permanent life insurance they need, with minimal impact to their cash flow.
When you present a permanent life insurance option, your client may well say that they can do a lot more with what an annual premium would cost than to buy insurance. You then have the IFA in your back pocket to overcome that objection. Once we return that premium, the funds can be redeployed for any of the client’s other purposes.
This positioning is critical, as is getting all the relevant parties on board. It’s important to dial in the client’s tax advisor, lawyer and bank in the early stages of introducing an IFA.
This provides an opportunity to educate the client’s other advisors, if needed, about the IFA strategy. Other matters to consider include who owns the contract, who acts as the borrower, how the arrangement is structured, what the tax implications are, etc. With everyone involved from the start, you can set proper expectations with your client on how this strategy will work. We can help you put together an IFA.
Simplify a complex process
The right experts can simplify a complex process. Insurance lending is a highly specialized field, and within that field the IFA is among the most sophisticated of strategies.
When you’re putting together an IFA for a high-net-worth client, keep it simple. Work with the IFA experts at Manulife Bank. Unlike many commercial loans, IFAs involve a high degree of customization. An experienced IFA lender is able to ask questions and uncover opportunities to help you optimize the efficiency of the structure.
Our goal is to support and enhance your own client relationships. With an IFA, you can give your clients a solution that will satisfy both their life insurance and cash flow needs.