Direct-to-Business Loans: Are Your Client’s Loans Tax Deductible?*
We recently worked with Kyle, an advisor at one of the nation’s leading mutual companies. Kyle has a client named Jim who runs a small cyber-security business with 25 employees in Palo Alto, California. A few years ago, Jim used his personal life insurance to take a loan with his insurance carrier to obtain working capital to invest in his business and hire new employees. Jim’s existing carrier loan was $870,000.
Jim was not happy with paying the incredibly high interest rate the carrier offered him. Jim was responsible for nearly $70,000 worth of interest every year and if he did not pay this amount, his carrier loan would eventually exceed the amount of cash in his policy and he could potentially lose coverage.
Kensington was able to refinance his loan down from 8%, which the carrier offered him to a much lower rate that was based on prime. Jim booked) the loan directly to his business, generating tax savings in the form of deductible interest payments*. The net after-tax interest the client was responsible for was only $21,000, making his annual interest savings approximately $48,700. Because the client was saving this amount, he was able to follow through with an additional talent acquisition for his company’s software development team.
*Please consult with tax advisor
Policy Holder Refinances and Saves Money: Agent Prevents Policy Lapse
When we first met with Meredith, an insurance agent, she was worried about her elderly client who had borrowed against her whole life insurance policy a few years ago to cover $500,000 in medical costs. The client was servicing $40,000 per year in interest, and due to the compound interest, the cumulative loan was growing faster than the cash value in the policy. Without intervention, Meredith knew that the policy would soon lapse meaning her client would not have the coverage that she wanted to pass along to her heirs.
Thankfully, Meredith learned about Kensington’s low-interest rate alternatives and was able to advise her client to refinance the loan at a more affordable cost. They were able to reduce the annual interest from $40,000 to $22,500, with a savings of $17,500 per year. Most importantly, Meredith’s client was able to preserve her policy and maintain her coverage.
Using Life Insurance Liquidity to Capitalize on Business Opportunities
When Fred, a financial advisor at a large wirehouse met Kensington, one of his top clients was about to redeem nearly a quarter of a million dollars from his investment portfolio. As a real estate developer, this client needed immediate liquidity to take advantage of a real estate opportunity. With the stock market off its peak, Fred knew that his client would be locking in losses and risking the opportunity cost of a market comeback if he redeemed his portfolio.
When he explained the risks to his client, Fred was able to identify that the client had five whole life insurance policies with a total of $700,000 in cash value. Kensington was called in to provide the liquidity the client needed to capitalize on his real estate opportunity, and with the streamlined online application and underwriting process, the client was able to fund his real estate purchase for $244,000 quickly. A second loan in the amount of $400,000 was utilized to purchase additional life insurance for the client to cover an additional line of credit that the client needed to secure for the property development. The client was very pleased to learn that Kensington’s loans were not listed on his credit report or with the UCC; and therefore, the client was able to obtain the additional line from another lender because the Kensington loan was not listed as a liability on his credit report. Now the client has acquired a sizeable book of real estate and is very pleased with the unique leverage strategy that his financial advisor brought to his attention.
More Cash, Same Interest Payment.
Adriana has focused her insurance practice to include the next generation and usually recommends that her clients purchase insurance for their children to lock in lower premiums and begin building cash value early. One of her relationships, which established their first insurance policy with her over 20 years ago, accepted her recommendation and now the household includes policies with $500,000 in cash value among the parents and the now adult daughters. The client had taken a policy loan of $250,000 to assist with his daughters’ college expenses previously, but at high interest rates, his interest payments totaled $20,000 a year.
When the client approached Adriana regarding additional liquidity needs, she introduced him to Kensington. For roughly the same interest payment, Kensington was able to refinance the existing loan and add an additional $200,000 in liquidity. With these funds, the client funded two new policies for his young grandson and granddaughter. These policies are currently growing in cash value and will eventually be leveraged for the next generations’ educational endeavors.
Cash Value Loans for College
Over the years, Richard, a financial advisor based in New York, has grown his advisory firm to include retirement and college planning. One of his clients, Jerry, requested his input with both of these topics recently, when Jerry asked Richard for ideas to help him fund his grandson’s college education while continuing to meet his own expenses in retirement. Jerry had accrued $200,000 in cash value on his whole life policy, and had already taken out $100,000 through a carrier loan for prior personal financial needs, for which he was paying $8,000 a year in interest due to high carrier loan interest rates Richard and the client both knew that a loan at 8% was high for the market and they desired to acquire a more affordable loan to capitalize on the client’s liquidity and not frivolously spend when they knew that tuition bills were right around the corner.
Richard first recommended that Jerry consider a traditional student loan, but Jerry did not feel comfortable having his credit checked and impacted by a loan. Rather than enter into another personal guarantee, Jerry wanted to explore a lending option that would allow him the flexibility to provide for his grandson’s college, but still obtain other lines of credit for his many business opportunities. Because Kensington does not run any credit checks and we do not list our loans as liabilities on our client’s credit reports, Kensington was able to provide the necessary liquidity without affecting Jerry’s credit score by accepting his whole life insurance cash value as collateral. Jerry did not have to enter into a personal guarantee, open a bank account with another lending institution, or impact his credit in order to provide for his grandson.
For the same interest cost that Jerry was paying for a $100,000 loan, he was able to obtain a $184,000 loan with Kensington that funded his grandson’s four-year degree. Jerry was very appreciative that Richard shared this unique loan structure with Jerry.