How advisors can use insurance lending to serve the cash flow needs of high net worth clients.
Clients, and often their advisors, too, aren’t always aware of the practical applications of cash surrender value lending. But although permanent life insurance is often viewed as a passive asset, it can also unlock opportunities for policyholders who want a convenient line of credit.
People frequently seek out loans or lines of credit to invest in their business or the market, to carry out a home renovation or to meet other short- or long-term financial needs. A permanent life insurance contract provides that flexibility.
These life insurance contracts can help generate significant cash surrender value. Policyholders can use the cash value to secure a line of credit and “activate” the cash inside their permanent life insurance contract.
Why should you educate your clients about this strategy?
The best time to borrow money is when you don’t need it. This way, the money is already accessible and ready to be deployed, allowing clients to be nimble when the right opportunities to invest or spend arise.
A life insurance contract can be the chassis of a financial plan, providing a framework that makes other strategies possible. Insurance lending is one of those strategies.
Unlike the commonly known policy loan, this isn’t a term loan. It’s a revolving line of credit, so people can use the funds as they wish, without applying every time they need money. As they pay the money back, the proceeds of the line of credit become accessible again. If the line of credit is completely repaid, it costs the client nothing in interest, but they still have access to low-cost financing whenever they need it.
The minimum commitment is interest only. Current interest rates are competitive, often one to three per cent less than some borrowing alternatives. Clients pay the interest only on the money they borrow, not the approved limit.
Cash flow benefits with an Immediate Financing Arrangement (IFA)
Some insurance lending solutions can help advisors make the full insurance recommendation. Consider a situation where you assess a client’s insurance needs, and they say they can make better use of the premium amounts elsewhere.
Conversations about the IFA borrowing strategy make the most sense at the outset, when advisors are going through insurance discovery with high net worth clients. The permanent life insurance need is determined first and foremost. The IFA comes into play when the client recognizes the need for insurance protection and can afford to make premium payments but would also like to take advantage of investment opportunities.
Here, insurance lending can help minimize the impact of premium payments on the client’s cash flow and allow them to deploy the capital into, for instance, their business or investment portfolio.
When positioned as part of an overall financial plan, presenting an IFA demonstrates not only that the advisor cares about ensuring the client has permanent life insurance protection, but that they are also taking a holistic approach to their client’s cash flow and investment needs.
Since the IFA is separate and not attached to the life insurance contract itself (as is the case with a policy loan), there’s less potential for tax issues. Depending on how the money is invested, the interest paid on the line of credit may be tax deductible.
Tapping into the cash surrender value is also a popular strategy in retirement. In many instances, the funds drawn from these insurance lending solutions offer some attractive tax advantages as well, making a permanent life insurance contract with cash value another source of retirement income.
If a client is using insurance lending as a tax strategy, always recommend that they contact their tax professional for advice on structuring the loan and proper use of the funds to ensure tax savings are maximized efficiently.
Add value for clients
Manulife’s goal is to support and enhance your client relationships. If your practice is focused mainly on insurance and/or investments, lending may not always be top of mind.
Nonetheless, having the right knowledge about insurance lending is like having another tool in your toolbox. It can add value for your clients by giving them timely access to the cash in an often-overlooked asset – their permanent life insurance contract. At a minimum, insurance lending should be part of your clients’ annual review process.
Insurance lending is a highly specialized field and may be seen as complex. That’s why it’s important to work with an experienced lender who can ask the right questions and uncover opportunities to give your clients a solution that will satisfy both their life insurance and cash flow needs.
Manulife Bank’s team of insurance lending specialists is ready to assist with all your questions to help you make the right recommendations for your clients.
* Clients should consult their own tax advisors with respect to their specific situation.