The M+ Method

Why Premium Financing Life Insurance?

For M+ clients, protection planning presents specific obstacles + demands innovation.

High-net-worth clients often have specialized requirements for their financial planning, including a need for significant amounts of life insurance to account for future estate taxes. However, covering expensive policy premiums can divert cash from growth opportunities.

Premium Financing offers a potential solution. Our team can help you build, implement, and manage a customized system of asset allocation, estate planning, banking relationships, and trust management, allowing appreciable assets to remain invested.

 
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TITLE: Intro

How Premium Financing Works

To understand how and why premium financing may be beneficial for your particular situation, it’s important to also understand how premiums are paid in a traditional setting.

The Traditional Way pt. 1

The Traditional Way

Typically, when you want to buy life insurance, you go to an insurance carrier.

The Traditional Way pt. 2

The Traditional Way

If healthy enough, the carrier would issue the coverage. If wealthy enough, that coverage would be owned by a trust.

The Traditional Way pt. 3

The Traditional Way

These policies come with two major components:
Cash Value + Death Benefit.

The Traditional Way: Death Benefit

The Traditional Way

Death benefit is for the benefit of the beneficiaries of the trust, to pay for estate taxes, provide income for a surviving spouse, pay for your kid’s college, etc. In a business planning case, it could be used to fund a buy-sell agreement or protect against the loss of a key employee.

The Traditional Way: Cash Value

The Traditional Way

The Cash Value is also available to the trustee, for the benefit of the trust beneficiaries. In the case of individual ownership it is available for the owner’s benefit. It may be accessed to use as needed, keeping in mind that accessing this policy equity will reduce the death benefit.

The Traditional Way: Example

The Traditional Way

In traditional situations the client will give money to the trust for the policy premiums or will pay premiums directly to the insurance carrier.

When there is a need for very large death benefits, the premiums can be proportionally as large. It is not uncommon to see clients paying $50,000, $100,000, or even as high $400,000 out of cash flows…

The Traditional Way: Example

The Traditional Way

…While premiums this large may be reasonable to some people that have significant assets or income, the premium payments may begin to take away from the client’s opportunity to accumulate wealth in other asset classes that have higher returns.

This is where financing comes in. Financing is for the clients who are able to return more on invested assets than they would be repurposing those dollars to pay for life insurance.

TITLE: Premium Financing

Premium Financing: How It Works

In the case of premium financing, we add a few more parties to the transaction.

Rather than paying premiums directly to the carrier, you’ll pay interest to a lender, which ultimately pays the premium.

Premium Financing: At Inception pt.1

Premium Financing: At Inception

The trust and lender enter an agreement where the lender provides the financing each year in order to pay for policy premiums on behalf of the trust. In exchange, the trust agrees to pay interest to the lender every year.

You, the client, will give the trust enough cash to pay interest on the loan and post collateral to cover the shortfall between policy cash values and the principal of the loan.

Premium Financing: At Inception pt.2

Premium Financing: At Inception

Each party to the transaction is looking for certain criteria to be met in order to approve the transaction. For carriers, properly designed financed policies should have longevity, leading to an increase in profitability.

For lenders, the primary concern is interest payments and loan repayment. To meet the institutional needs, we typically use heavily guaranteed high-cash value policies that ensure principal growth within the cash value of the policy.

Premium Financing: At Inception pt.3

Premium Financing: At Inception

In premium financing, the two parties from the Traditional arrangement (Insurance Carrier + Trust) add a third party, the Lender.

Trust and lender enter an agreement where the lender provides loan each year to enable the trust to pay the policy premiums. Trust agrees to pay interest to bank every year. You, the Client, will give the Trust enough cash to pay interest on the loan. The lender will require collateral as part of the agreement, which at inception will include not only the policy but also additional assets.

Premium Financing: At Inception Policy

Premium Financing: At Inception

Your trust-owned policy—along with your personal funds—become collateral for the loan until repayment.

Since the policy is pledged, the lender has the first right to policy cash values and death benefit while the loan is in place, meaning that the funds available to the trust will be net of the loan.

in addition to gifts of interest, you should maximize your annual gifting to the trust. You may also make gifts using lifetime gift exemption.

Premium Financing: At Inception Collateral

Premium Financing: At Inception

Collateral can be posted as either cash or securities. While cash is susceptible to inflation, securities come with market risk and volatility.

Premium Financing: Many Advisors

Premium Financing: At Inception

While many advisors suggest making annual interest payments and posting cash collateral, we believe there are more effective strategies. Calculating and devising a “sinking fund” strategy can account for both interest payments and collateral needs.

By structuring your coverage this way, you’re optimizing the growth of your own funds by keeping your money invested.

Premium Financing: At Inception Variables

Premium Financing: At Inception

The three largest variables to premium financing are interest rate risk, policy performance risk, and collateral risk. Typically interest rates are floating and costs can go up in a rising rate environment. Policy performance is based on dividends, which are not guaranteed. Collateral risk or market volatility must also be managed when securities are posted.

TITLE Premium Financing: Exit Strategy

Premium Financing: Exit Strategy

An exit strategy is a necessary piece of your overall case design, but because it will be implemented in the future, we cannot predict all of the factors that may influence how you ultimately choose to approach it.

Therefore, while a provisional strategy should be discussed, we may find that a different strategy or combination of strategies may be more suitable at the time of exit.

Premium Financing: Exit Strategy

Premium Financing: Exit Strategy

Trust repays loan using policy values. Policy values may be accessed via policy surrenders and/or policy loans.

Premium Financing: Exit Strategy

Premium Financing: Exit Strategy

Trust repays loan using non-policy assets.

Premium Financing: Exit Strategy

Premium Financing: Exit Strategy

Grantor repays loan using personal assets. Personal assets include any that are still within one’s estate. Often the repayment can be timed to the sale of a business or buyout of partnership.

Premium Financing: Exit Strategy

Premium Financing: Exit Strategy

Some combination of option 1, 2 and 3, is also acceptable.

The diagram is not intended to be a comprehensive summary of the gift and estate tax consequences of the transfers depicted. Additional details are available in footnotes on Our Legal Summaries Page.

“A tested process that ensures fit + viability.”

More than theoretical,
the M+ Method is
a time-tested system.

We have established a six-step process to take the guesswork out of Premium Finance Life Insurance planning + implementation. Our calculated + conservative approach accounts for unforeseen volatility, while providing advisors and clients the concierge experience they deserve.

  • 1

    STEP 1/6

    Introduction to PF + Advisor Education

    We start with a thorough overview of our approach, introducing select advisors to the M+ method. During this phase, we share knowledge and provide instructions for the next steps prior to client introduction.

    • Review Concept + Sample Cases
    • Send Opportunity Analyzer

  • 2

    STEP 2/6

    Information Intake + Modeling

    After receiving client information, we analyze the data to determine fit. Our proprietary modeling system ensures that the plan is appropriate for the client’s needs.

    • Begins when all necessary data is submitted to our team.
    • Review Opportunity Analyzer + request additional info
    • Build Client-specific Case
    • Schedule Advisor meeting to review completed case

  • 3

    STEP 3/6

    Client Education + Model Refinement

    During this step, we evaluate and customize a transparent, flexible plan based on client input, risk tolerance, and findings from our evaluative process.

    • Review case with Advisor and make appropriate adjustments to the case
    • Meet with Client and Advisor to present the case and answer questions
    • Refine model as needed
    • If approved, begin Underwriting process.

  • 4

    STEP 4/6

    Underwriting
    Insurance, Bank + Legal

    As we formalize a plan, we introduce it to our network of trusted institutional partners. Each has been selected based on their commitment to clients, quality of service, and dedication to unequivocal excellence.

    • Life Insurance underwriting
    • Bank Financing underwriting
    • Legal review and trust formation

  • 5:

    STEP 5/6

    Refine, Review + Execute

    With due diligence complete, we implement all aspects of the customized plan. The M+ team efficiently guides the process, ensuring every detail of the transaction is finalized.

    • Financing terms negotiated with bank
    • Conduct a detailed review of the offers with advisor + client
    • Stress test client’s policy + plan
    • Final review and execution of loan documents

  • 6:

    Step 6/6

    Protection, for a Lifetime

    The last step of our process is transitioning a case from strategy + implementation to management. We actively monitor policy and investment performance, along with any changes in the lending environment, to ensure plan strength + stability.

    • Fund insurance policy and document transaction details
    • On-going maintenance to optimize based on changes in economic conditions

In a standard engagement, each of these steps takes approximately one month to complete.

“Our team stands out in the industry because we care more than the rest.

We prioritize integrity, and make sure our clients fully understand what they are doing and why it’s important.”

KULDEEP MADAN

Our experience guides
advisors + their clients.

The success of the M+ Method for Premium Life Insurance Financing process relies on a team of strategic + implementation experts. We’re by your side every step of the way, providing guidance, insight, and support. Trusting the process and camaraderie are the foundation of our advisory relationships.

Get to know us

M+ Madan+ Associates Logo
Exclusive Life Insurance Planning for
High-Net-Worth Clients & Their Advisors

E: info@madanfinance.com  |  T: 732.406.7524  |  F: 631.240.4313

Licensing   BrokerCheck by FINRA   Customer Relationship Summary

Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC (www.SIPC.org). Madan+Associates is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. OSJ is located at 48 S. Service Road, Suite 400, Melville, NY 11747; (516) 391-0300.

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