I recently reviewed a Premium Financed Life (PFL) illustration given to an agent who was considering buying it on himself. I was so outraged that I was motivated to create this newsletter.
To download the PFL proposal so you can see the numbers, click on the following:
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What else outraged me? The premium was only $37,313 a year. PFL life is NOT for lower-end clients. PFL is for more sophisticated higher net worth clients. I believe this PFL sale is unsuitable.
Why was I outraged at the PFL proposal? The numbers were stunningly bad. The agent could have achieved (illustration-wise) a better outcome two different ways WITHOUT using PFL.
The PFL numbers vs. alternative uses of IUL
www.advisorshare.com/pfl-for-income
https://riaoutofthebox.com/overview-webinar
The PFL illustration shows the client paying $25,000 out of pocket for the 1st five years. All other premiums were paid from a 3rd party lender.
Annual premiums each year for ten years = $37,313
Total projected loan interest to be paid off in year 15 = $417,000!
Remaining cash surrender value (CSV) after paying back the loan = $107,273
Amazingly, after 15 years, there is only $107,273 in CSV after paying $373,313 in premiums.
What if the policy went through a flat stock market like from 2000-2009? A flat market in the funding phase or in the early borrowing phase could destroy this structure.
Tax-free loans annually from the PFL structure from ages 68-90 = $14,000
The outcome if the client did NOT use this PFL structure
The outrageous thing is that if the client simply took the $25,000 in out-of-pocket paid for five years and funded a “good” IUL policy, he would have had a better outcome with NO interest rate risk and without having a huge $417,000 loan on his policy in the 15th year.
Tax-free loans from a “good” IUL from ages 68-90 = $26,558 (with $224,362 in CSV in year 15)!
So, why would this agent use PFL if the illustrations are better when NOT using PFL?
Hmm…I don’t know, maybe because the commissions are higher?
Premium Financed Life (PFL) WITHOUT the Loan!
I wrote an article a few years ago where I compared PFL vs. hyper-funding. To read this past newsletter, click on the following link:
www.advisorshare.com/pfl-without-the-loan
I’m NOT a fan of hyper-funding, but the following are the advantages over PFL for income:
1) No 3rd party loan
2) No interest rate worries for the next 15 years on the PFL loan
3) The client is in control of how much leverage they want to use in any given year
4) More illustrated borrowing
If the above is true, why would anyone use PFL for income? I wouldn’t and that’s what my past newsletter detailed (with illustrations).
What would be the tax-free borrowing in this example case if the agent hyper-funded?
$33,026 from agents 68-90.
PFL for Income Summary
The client can use PFL, borrow money to increase premiums, and create leverage (which means the structure is subject to interest rate risk); or
The client can simply take the money allocated PFL and fund a “good” IUL policy.
The difference in annual tax-free cash flow from 68-90 is stunning:
PFL = $14,000
Funding a “good” IUL and NOT using PFL = $26,558
Hyper-funding (NOT recommended but safer than PFL) = $33,026
While pitching clients a unique/not well-known structure to help solve their retirement income dilemma sounds exotic and can help make sales (and help agents earn higher commissions), it’s an advisor’s job to think critically about what they are offering clients and MOST importantly, it’s an advisor’s job to do what’s in the client’s best interest. Not doing so can get you sued.
Disclaimer—my past newsletter and this newsletter go over two specific fact patterns. There may be a PFL illustration that does work for clients better than simply funding a “good” policy or hyper-funding. I’ve just not seen that illustration yet.
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