The “Efficient Frontier Strategy” leverages tax-free retirement income by adding additional premiums combined with policy loans — without the need for financing premiums.
by nextpoint solutions
The “efficient frontier” is generally defined as the set of asset growth opportunities or portfolios that offer the highest level of return for a given level of risk. The Efficient Frontier Strategy (EFS) applies this same concept to life insurance. Similar to portfolio theory, there is an optimal set of PPLs (Premiums plus Policy Loans) that can be added to certain index universal life (IUL) insurance policies to maximize income for a given level of risk. Moreover, there may be diminishing returns once the optimal size or number of PPLs is exceeded.
Judicious use of PPLs, along with ongoing monitoring, can significantly increase policy performance similar to other leveraged scenarios, without the need for third-party financing and the many associated risks of borrowing from banks and other lenders to fund premiums and create leverage. For example, because EFS is not a premium financed transaction, it avoids the following risk factors that are typically associated with adding leverage: (1) ongoing interest payments subject to variable interest rates, (2) ballooning loan balances if interest is allowed to accrue, (3) lender assignments against the policy and restrictions against the use of cash value, (4) required additional assets in the event of collateral gaps, and (5) large lump sum distributions required to pay off the loan,
Of course long-term policy loans, even when partially offset by the addition of more premium, add their own level of risk to the policy. It is important therefore to evaluate the various types of policy loans available to determine whether they are participating, whether interest rates are fixed or capped, at what rate, and whether these are likely to be offset on average by a combination of crediting strategies, persistency bonuses, and performance factors.
The Efficient Frontier Strategy is easy and flexible. Not only is there no bank loan or other third-party lender involved in the transaction, there is no required up front commitment to any future series of policy loans. Each transaction is monitored case-by-case and year-by-year to determine the most efficient and most suitable course of action. Whether you add PPLs or not in years to come, it’s important to illustrate this opportunity now, so your clients are at least aware the opportunity may exist later. Order your EFS proposal today.
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