As technology continues to improve
and people live longer, creative financial planners are finding alternative methods to help their clients live more
financially comfortable lives.
One of those methods is accounts receivable financing, a strategy that allows an
insured retiree to make cash withdrawals
against a death benefit policy while still
alive. The program is especially popular
with physicians, as it includes a provision
that protects assets against frivolous and
nonmerited lawsuits.
“This is very exciting, and it’s going to
apply to so many people,” says Rick Appel,
CPA and senior vice president for
Advanced Strategies Group. “It’s a tremendous way to accomplish many goals from
current asset protection to providing
future retirement income on a tax-preferential basis that has no equal.”
Smart Business talked to Appel about
what makes accounts receivable financing
work for physicians and business owners
alike.
How does the program work?
A bank makes a noncallable note basis
loan to the business, which could be an
individual or professional corporation, a
regular C corporation, a sub-chapter S corporation, a partnership or a limited liability
company. The business would transfer the
funds to the employee or physician, who
would in turn remit it to a premium deposit
account for the purpose of paying life
insurance premiums. This would occur
over a period of five years to fund the life
insurance policy. The best type of policy is
a global-indexed universal life policy.
The loan amount would be made on the
basis of the accounts receivable of the
physician’s practice or the business. A
UCC-1 form is filed that provides protection from creditors on these assets, assets
that normally aren’t productive and are
usually converted to cash. We basically
take that money and put it into the life
insurance policy. Within five years, you will
have a fully funded global indexed universal life policy. When the insured reaches
retirement age, the policy will allow tax-free withdrawals that can be used to fund
his or her retirement.
Each and every year, from the time of
inception of the program until retirement,
the cost to the individual would only be
the annual interest payments on the loan.
The benefits are tremendous because the
interest rate is LIBOR — a common
benchmark interest rate index that’s used
to adjust adjustable-rate mortgages —
plus 1.75 percent.
How are the life insurance policy’s crediting
rates determined?
Three components make up the rate the
policy earns and its cash value. One is
Standard & Poor’s 500 Composite Price
Index, which represents about 70 percent
of the market cap of U.S.-traded companies. The second is the Dow Jones
Eurostoxx 50, which are the leading companies in the Euro zone. And the third is
the Hang Seng Index, which has the 33
largest Asian companies and is representative of the majority market cap for that
area.
Each five-year interval has a five-year
look-back period calculating the performance of each index. The highest performing index is weighted at 75 percent, the second-highest is 25 percent and the lowest is
thrown out. The result produces higher
interest crediting rates than other interest
crediting methodologies by overweighing
the best performing index. The difference
between the interest paid on the loan and
the crediting rate on the policy’s account
value produces an arbitrage that has
tremendous leverage.
Can you give an example of the program in
action?
A physician is 42 years old and his practice’s average accounts receivable is
$820,000 a year. He borrows that amount
and purchases a $3.5 million death benefit
policy. Over a five-year period, he puts
$820,000 into the policy and each year pays
$59,000 to carry the loan.
Assuming age 65 is retirement age, he
starts pulling out more than $366,000 a year
of the policy cash value on a loan basis,
which is nontaxable, and he does this from
age 65 to 85, which would yield a total of
$7.69 million in nontaxable retirement benefits. The compounding is tremendous in a
tax-free build-up inside the life insurance
policy.
At the same time, he had a large death
benefit that increased from the original
$3.5 million to the time when he started
making withdrawals. Over the years the
policy was funded, he would have paid
$830,000 in interest while pocketing more
than $7.6 million in tax-free money.
He had the option of paying off the loan
when he started retirement from the policy
values or he could have paid it from other
sources or waited for the death benefit to
pay it off.
RICK APPEL is a CPA and senior vice president for Advanced
Strategies Group. Reach him at (248) 359-2480 or
[email protected].