Life Insurance Premium Financing

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The Manufacturers Life Insurance Company of New York100 Summit Lake Drive, Valhalla, New York, 10595www.manulifenewyork.com

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Premium Financing Summary

Loan to purchase life insuranceNon-amortizing loan (interest only)Leverages insurance assetsMany different options for third party lenders

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Client Profile

High net-worth individual with insurance needs

Ability to pay for premiums

Understands leveraging concepts

Has alternative uses of cash

Motivated by internal rates of return and estate planning objectives

Does not want to liquidate assets

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Standard Loan Structure

Third party lender loans funds to qualified borrowers to pay life insurance premiums

Balloon structure/interest paid in advance

Floating rate/fixed spread

A few lenders may offer a fixed interest rate

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Standard Loan Guidelines

Generally, no fees, points, or prepayment penalties

Secured lending

Requires annual re-qualification and review of collateral

Collateral decided on a case by case basis

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Requirements

Borrowers should have minimum $5 million net worth, $100,000 annual premium

Non-variable products only

Financing MECs is not advised

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Loan Collateral

In most instances, the insurance asset will secure the insurance loan over time

Collateral types:– Policy cash surrender value

– Policy death benefit

– Liquid collateral• Cash, CDs, Money Market Funds

• Marketable securities (50% discount)

• Letters of credit

Personal guaranty may be required

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Interest Options

Interest in advance (beginning of year)

Interest in arrears (end of year)

Deferred interest (in limited cases)

Interest rates may be adjusted annually or may be a fixed rate

Size of premium usually impacts spread on interest rate

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Repayment Options

In many cases, the loan will be repaid from the policy death benefit

The loan can also be repaid during the insured’s lifetime from the policy cash value and/or a side fund of cash

Partial or full repayment of principal can be made – no prepayment penalties

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Trust is the policy owner

Lender Insured/Grantor of Trust

Manulife New York Life Insurance Policy

Grantor’s Heirs

Irrevocable Life Insurance Trust (ILIT)*

Grantor makes gifts to trust to pay interest.

Heirs receive trust proceeds.Trust receives

death benefit free from estate and income taxes.

Trust pays interest to Lender

Lender funds premium

*Trust should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws, including generation skipping tax. Failure to do so could result in adverse treatment of trust proceeds.

Premium Financing Flowchart

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Self-Financing

Premium financing can also be done privately with the insured, a family member, or the insured’s corporation

Interest has to be set at a fair market rate

Can help avoid gift taxes

An alternative to split dollar

Self-financing may remove the need for collateral

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Premium Financing Applications

Estate Liquidity, Gift Tax Leverage

Key Person, Deferred Compensation, Buy-Sell Arrangements

Split Dollar Rollout

Family Limited Partnerships (FLP’s) and Limited Liability Companies (LLC’s)

1035 Exchanges and Term Conversations

Examples of Premium Financing Applications

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Example #1: The Power of Leverage (Peter and Nella Simon)

Business Owners who want to keep their assets invested and appreciating.

Need to buy a survivorship policy for estate liquidity purposes.

Want to cut down on out of pocket and gift tax costs.

Considered split dollar but decided against it.

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The Solution

Peter and Nella’s Trust will take out a $2 million loan for a single pay premium of a Survivorship UL policy*.

The trust will pay interest each year on loan.

The Simon’s can apply their gift tax credits to the premium gifts.

The loan principal will be paid off from the policy’s death benefit.

Survivorship UL is a life insurance product issued by The Manufacturers Life Insurance Company of New York.

*68 Peter, 73 Nella non-smoker preferred risk (both)

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The NumbersFinanced Non-Financed

Year Interest

5.5% $2M

DB

Net of Loan

IRR Death Benefit

IRR

1 (110,000) $8,710,938 7819.03% $7,506,837 6724.40%

5 (110,000) $ 8,710,938 112.02% $7,506,837 104.65%

10 (110,000) $ 8,710,938 36.27% $7,506,837 33.65%

15 (110,000) $ 8,710,938 19.05% $7,506,837 17.42%

21 (LE) (110,000) $ 8,710,938 10.90% $7,506,837 9.76%

This is a hypothetical illustration and is not intended to project actual performance. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed.

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Example #2: Key Person Insurance (Kevin Arnold)

Founder and CEO of his company.

Business has significant real estate but limited disposable cash.

Company needs to buy a $12 million key person policy on Kevin (age 48) with a premium of $150,000 annually for 20 years.

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The Solution: Premium Financing

The company considered purchasing a 20-year term policy.

Kevin does not plan on retiring anytime soon.

The company is also looking for a way to supplement Kevin’s retirement income.

Interest rates are at an all time low.

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The Numbers

The Company will take out a loan of $150,000 a year for 20 years.

The loan will be paid off in year 21 from the company’s retained capital account.

In year 21 the potential cash value available for supplemental retirement income is $4,429,272.

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Premium Financing v Term

Premium Financing Term Insurance

Annual Interest rate may be lower than annual term cost.

Low annual premiums.

Premiums will generally remain level.

After level term period the amount to pay the premium increases significantly.

Once loan is paid off, the cash surrender value is available to supplement retirement income.

No cash surrender value.

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Example #3: Split Dollar Rescue (Susan King)

Susan needs to terminate her existing split dollar arrangement.

At age 78, term costs are very high and the split-dollar rules are changing in 2004.

She can use financing to pay off the “rollout amount,” and then do a 1035 exchange with premium financing.

The "Replacement" of existing policies should only occur when it is demonstratively in the best interest of the client and in compliance with all applicable state and Company requirements. You may incur acquisition costs and there may be surrender costs deducted from your policy or contract.

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Split Dollar Example

Susan can apply for financing to cover the rollout amount and replace the split dollar arrangement with premium financing to minimize her gift tax costs (1035 exchange).

She needs to maintain a policy with a $20,000,000 death benefit.

The same concept can be applied to clients with large loans on large whole life policies.

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Here are the Numbers

Financing for premium and rollout payoff is $3,973,577 in Year 1.After the first year, premiums of $1,146,039 are paid for the next 10 years.Susan can defer interest payments for 5 years internal rate.In year 11, she can use the retained capital account to start paying off interest.The death benefit can be used to pay off the loan principal.

This is a hypothetical illustration and is not intended to project actual performance. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed.

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Example #4: Gift Tax Leverage (Lucy Boyle)

Lucy, age 82, needs to buy a $20,000,000 policy.

Premiums are $3,393,468 for 4 years.

She can pay interest annually and significantly reduce gift tax and out of pocket costs.

The loan can be repaid from the death benefit.

This is a hypothetical illustration and is not intended to project actual performance. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed.

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For more information on Premium Financing, please call your local Manulife New York Representative, or the Advanced Markets Group at(800) 743-5542, option 5

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