How can an IFA help balance a client’s cash flow with ongoing insurance considerations?
Previously in this series, we talked about how these insurance contracts generate cash value, which policyholders can use to get a line of credit. It is an approach. There’s another that takes advantage of permanent insurance in a different way, this time focusing on cash flow.
it’s called a Immediate Funding Arrangement (IFA). Advisors can introduce it as a way to meet a client’s permanent life insurance needs, while having minimal impact on their business’s cash flow. For clients who want life insurance protection and a cash flow solution, this approach can be the best of both worlds.
An ACI targets high net worth clients who may have significant life insurance needs and therefore significant premiums. These are clients who can afford to pay the premiums for a permanent life insurance policy but prefer unimpeded access to their cash flow. Typically, once customers pay the premiums out of their own resources, a lot of money is no longer accessible. With an AFI, once the policy is in effect, they can borrow up to 100% of the premium amount each year.
Customers can use this money as they see fit, especially for their business or other investment purposes. All they have to do is pay interest on the IFA advance every month. The IFA is separate and independent from the life insurance contract itself, i.e. the interest rate is not linked to the insurance contract.
From a cash flow perspective, the impact of large insurance premiums is replaced by the much lower interest amount. Additionally, if a client uses these funds in a way that generates income, they can often deduct interest. There may therefore be significant tax advantages* to go along with some of the tax deductibility features of the ceded life insurance contract itself.
As for the reimbursement of the IFA advance, it remains completely open. When the policyholder dies, the outstanding loan is repaid out of the death benefit and the balance is paid to the beneficiaries.
Our minimum eligibility is $ 30,000 per year in premiums (most lenders have a minimum of $ 200,000). Although our average case size involves premiums of just over $ 200,000 per year, we have many cases in the range of $ 50,000 to $ 100,000.
The right solution at the right time
Manulife Bank has a long and successful history with ACIs, the first of which dates back to 1995. ACIs are one of Manulife Bank’s core businesses, which is why we hire our most experienced corporate lenders and better informed to work there on behalf of your clients.
We can help you set up an IFA. This usually involves finding out about the case (which includes meeting with the client, their accountant, and their lawyer) and posting a discussion paper based on the agreed structure, and then underwriting Manulife Bank.
Your value as an advisor is to offer the right solution at the right time. Here, the insurance recommendation takes priority. Sometimes customers balk at the price, thinking of other productive things they prefer to do with these bonuses. This reasoning might sound sound, but it could mean that they might forfeit the insurance or consider a smaller amount of insurance coverage with its lower premium.
As their advisor, you always act in the best interests of your clients. This is where the IFA comes in. You can satisfy clients in their insurance and cash flow needs.
Ultimately, clients know they are protected and are free to take advantage of an IFA for a number of investment opportunities. We will talk about some of them in the next episode of this series.
Learn how to set up a Manulife Bank IRC today.
*Clients should consult their own tax advisers with respect to their particular situation.