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MC Stories – Financing Life Insurance . . . with Debt?

America is a society that has become extremely comfortable with financing. It’s rare nowadays for someone to pay cash for large purchases like their home, a car, or education costs. It’s also, however, more popular than ever for people to finance small purchases. Credit cards are used to buy groceries, gas, meals, clothes—pretty much everything.

With such widespread comfort around debt, it’s not a surprise that it’s used to finance life insurance premiums as well. This strategy has, in fact, been around for over 20 years (even longer in the property and casualty marketplace). Life insurance premium financing is where an insured borrows money from a bank to pay their life insurance premiums. The borrower is then responsible for posting collateral for the loan and paying the interest on the debt.

Today, financing represents around 25% of all policy premiums for in-force insurance policies. However, many people still haven’t actually heard of premium financing before and it has to do with the history of the strategy. In the early 2000s, a time known as the “Wild West” in life insurance sales, premium financing was used incorrectly and with limited regulations. Many people lost money and got hurt by taking on investments that they didn’t fully understand. Because of the stigma and reputation of its past, premium financing remains out of the mainstream conversation for many.

Fast forward to today, where the pendulum has swung far in the opposite direction and premium financing is now under strict regulation. The National Association of Insurance Commissioners passed Actuarial Guideline 49 in mid-2015 to protect consumers from misleading illustrations by limiting the growth rate and by limiting the policy design options that advisors are able to use in marketing to their clients. Also, all carriers now require the insured to have skin in the game by posting collateral and/or paying interest on the loans.

With stronger protections in place, the benefits that make financing life insurance special are much more attractive: the guarantees and the flexibility and optionality of the design, both from the onset as well as throughout the life of the policy. Because of these guarantees, financing life insurance can be a lower risk strategy to compound your wealth. That’s why the fastest-growing segment for premium financing is high earners in their 30s–50s. Rather than purchasing insurance for a death benefit, investors are looking to maximize their investment growth and increase their wealth to establish a future tax-free income stream in retirement. With interest rates near all-time lows, the benefits of using debt in a thoughtful way have never been greater.

But, as with any investment strategy, premium financing has additional risks not present when purchasing a policy without financing, such as having enough liquidity to post collateral, interest rate risk, and market risk. Financed life insurance should be considered for someone who has a need for a large-premium life insurance policy or is interested in compounding their wealth. Specifically, for business owners, financing should be considered as a smarter way to protect their company with a buy/sell agreement or key-person policy while keeping more cash available for other ventures within their business. If the business is a C-corp, there are even greater strategies to amplify the benefits. Given the nature of premium financing, it’s recommended that you consult your professional tax and legal advisors before purchasing a financed policy.

In my role as a financial advisor at Morton Capital, I collaborate with our internal financial planning team as well as outside insurance professionals to review and evaluate our clients’ life insurance policies. Although we don’t get paid for selling insurance, reviews are an integral part of ensuring our clients have the appropriate risk coverage and are taking advantage of investment opportunities when they align with their goals and risk tolerance.

 

Disclosures:

This information is presented for educational purposes only, and should not be treated as tax, legal or financial advice. This information should not be taken as a representation that the strategies described are suitable or appropriate for any person. All investments involve risk, including the loss of capital. You should consult with your insurance professional to thoroughly review all information and consider all ramifications before making any decisions regarding your insurance coverage.

 

 

MC Stories – Why You Should Give Your Children the Desire to Learn About Finances

Studies suggest that parents may dread financial conversations with children almost as much as the conversation about “the birds and the bees.” A 2018 study conducted by T. Rowe Price reveals that two-thirds of parents show reluctance in discussing money with children. Parents may find that it is only important to begin discussing finances when there is an immediate concern, such as a health crisis or an economic downturn. However, that is not the case. A keystone to growing up is independence and part of that is financial independence. A recent study shows that 64% of adults believe that by 22 years old one should be financially independent of their parents; but, only 24% of 22-year-olds are actually financially independent.

So, how do we create financially mature and independent adults? Teach them young. In today’s world, money has moved to the ether of numbers on a screen and plastic cards. We rarely use cash for daily transactions and checkbooks (or balancing them, for that matter) are a thing of the past. In the eyes of a child, it is becoming increasingly difficult to tangibly understand the value of a dollar. Realistically, it is becoming difficult for all of us to understand the value of a dollar. We must re-wire the way we think about money and then translate that to the next generation.

Parents have a unique responsibility of molding children’s development – particularly around their financial education. The T. Rowe Price study revealed that what children learn from parents (as opposed to financial literacy courses) strongly informs their financial decisions later in life. Parents revealed that the topics they wished their own parents had discussed with them were credit and financing, insurance, basic life budgeting skills, and investing. Using that as a baseline, it is suggested that these conversations begin early and become a central part of your relationship with your family.

Establish age-appropriate conversations and activities for your children. Here are some suggested age-appropriate methods. For young kids, you can make it fun, while also teaching them basic math skills. For children 6-10, help them understand the value of a dollar by creating ways for them to earn money. Once earned, they can decide how to spend and save money. Forgo the piggy bank and help them open a bank account. The earlier the better, because this is the new way of life and it is important for children to understand not only the value of a piece of paper, but the numbers on a screen. For pre-teens, help them learn budgeting for expenses such as activities with friends and extra-curricular. Give them allowances and see if it lasts. Introduce compounding interest and the importance of investing early. For late teens, teach about credit and the importance of maintaining good credit scores throughout life.

In addition to regular conversations and supporting strong habits, there are numerous online resources available for children and parents (provided below). It’s ok to not be an expert when it comes to finances. It is more important to instill an eagerness to learn within your children. That willingness to learn and grow will develop into great money habits and forge the way to a successful financial plan for your family. And as always, if you do not feel you have all the answers, please reach out to your financial advisor or a trusted source for more information. We are always here to help you and your families.

 

Resources:

-FDIC’s Money Smart for Young People (includes activities and resources for parents of all ages) https://www.fdic.gov/consumers/consumer/moneysmart/young.html
-Credit Card Insider https://www.creditcardinsider.com/learn/
-Stock Market Game https://www.howthemarketworks.com/
-Payback – Game to teach about student loan debt https://www.timeforpayback.com/
-Practical Money Skills (games/age-appropriate discussions for children) http://www.practicalmoneyskills.com/learn/life_events/family_life/educating_your_children