To change photo: 1.Delete the current image. This will leave a blank placeholder with a picture icon. 2.Click the icon to add a new image. The photo will be automatically be cropped to fit the placeholder. NOTE: If you use the “Change Picture” function, the image will be imported in its original proportions and won’t fill the placeholder completely and will need to be cropped. Financially, How do you Know? Mary Hanson September 2015 Assistant Chief Underwriter

To change photo: 1.Delete the current image. This will leave a blank placeholder with a picture icon. 2.Click the icon to add a new image. The photo will be automatically be cropped to fit the placeholder. NOTE: If you use the “Change Picture” function, the image will be imported in its original proportions and won’t fill the placeholder completely and will need to be cropped. 2 Premium Financing What underwriters need to know.

3 See Appendix for instructions on how to change sidebar photo What is Premium Financing? Premium financing is a way for affluent individuals, who don’t want to liquidate assets to pay for life insurance. Money is borrowed from a third party, such as a bank, to pay the premiums and pay the interest on the loan annually. The policy can accumulate cash quickly. Can be an investment opportunity when interest rates are low. What is it good for?

4 See Appendix for instructions on how to change sidebar photo History 101  Premium financing concept was introduced to the market in the early 2000s.  Target market clients with new worth $5 million or greater.  Ages 29 to 75 Who Knew?

5 See Appendix for instructions on how to change sidebar photo Types of Premium Financing  Traditional Premium Financing: loan is fully secured at all times by a combination of the cash value of the policy or outside collateral that may include bank deposits, stocks, bonds, business assets or personal holdings.  Hybrid Premium Financing: loan is only partly secured by outside collateral and cash value of the policy.  Private Premium Financing from a related party for example: parents funding the premium payment for life insurance on their children using a trust. Rather than gift the taxes to the trust or pay the taxes, the parents loan the funds to the trust. The trust uses the funds to purchase life insurance on the adult children. The loan must meet IRS interest rate rules.

6 See Appendix for instructions on how to change sidebar photo Non-Recourse Premium Financing  Program that uses life insurance as an investment for others rather than wealth protection.  How it works: An investor will lend an irrevocable life insurance trust the premiums to fund a large life insurance policy. The trust will typically be charged interest. The interest payment is deferred and the investor will require that the cumulative loan with interest be repaid by the trust at death or at the end of 2 yrs. o If the applicant dies within the 2 years, the trust will repay the investor o If the applicant doesn’t die, the trust can pay off the investor or release the policy to the investor. The investor can then decide to maintain the policy or sell it to another investor (STOLI)

7 See Appendix for instructions on how to change sidebar photo What do you need to know?  Source of the funds (must be in the US)  Duration of the loan-preferably minimum of 5 years  Annual interest due and should be paid by the insured yearly  Financial justification-minimum net worth of $5 million  Premium Financing should include as “exit strategy” to unwind the loan.  This concept is highly dependent on interest rates. Why do we care about the specific?

To change photo: 1.Delete the current image. This will leave a blank placeholder with a picture icon. 2.Click the icon to add a new image. The photo will be automatically be cropped to fit the placeholder. NOTE: If you use the “Change Picture” function, the image will be imported in its original proportions and won’t fill the placeholder completely and will need to be cropped. 8 Captive Insurers

9 See Appendix for instructions on how to change sidebar photo A captive insurance company primarily insures the risks of a business that is related by common ownership. Property and casualty risks constitute the primary risks insured. The operating business can insure these risks by: Commercial P&C coverage Self insurance Captive Insurance Company What is it? 9

10 See Appendix for instructions on how to change sidebar photo  Unless the marketing of the life insurance application involves a captive insurance company the short answer is: nothing.  Life insurance companies have also set up captives with regulatory implications but that is outside of the scope of this presentation.  If the marketing of life insurance sale is tied to the use of captive insurance company there are potential reputational risk considerations for the life companies as well as the brokers.  Life Insurance with cash value is generally accepted as an investment holding by the captive as part of its reserves.  Is life insurance the appropriate investment vehicle for the captive?  When would a captive consider investment in a life insurance policy? Captive Insurance Company What does this have to do with life insurance? 10

11 See Appendix for instructions on how to change sidebar photo  The IRS included captive insurance on it’s ‘dirty dozen’ list of tax scams for 2015 involving the abuse of legitimate tax structure in the set up small or micro captives that elect to taxed only on investment income, excluding up to $1.2 million net premiums per year.  When set up of a captive insurance company is mixed with a life insurance sale there may be a reputational risk arising from the marketing as well as the set up and operation of the captive.  The IRS position has evolved over the years to include ‘safe harbors’ partly as a result of court challenges in the past.  A growing number of states are establishing favorable regulations for setting up captives within state with the result there is more growth in domestic micro captives than foreign captives Captive Insurance Company Why would there be potential reputational risks? 11

12 See Appendix for instructions on how to change sidebar photo  Commercial coverage may be more expensive, or the type of coverage needed may not be available.  Self insurance is an expense that impacts the bottom line  Captive Insurance Company May have favorable tax consequences for the operating company Provides access to reinsurance coverage May be less expensive than commercially available coverage May allow greater management control of the claims coverage Captive insurance payment of claims may be integrated with self insurance or commercial coverage Setting up a captive is a complex process that involves meeting regulations in the location of domicile, setting up reserves and meeting the risk transfer requirements. Captive Insurance Companies Why would the operating company chose to set up a captive? 12

13 See Appendix for instructions on how to change sidebar photo  The growth in establishment of captives has been in smaller businesses and family owned businesses. These are captives that qualify for the tax benefit of section 831(b) of the tax code.  These captives have premiums that do not exceed $1.2 million per year and elect to have those premiums excluded from taxation.  They are taxed only on the investment income.  Nevertheless these captives are insurance companies and should have claims payments that will impact the tax benefits of receiving tax free premium income to invest. Captive Insurance Company What are micro captives? 13

14 See Appendix for instructions on how to change sidebar photo  Foreign or domestic captives both are legitimate. But which does life insurance company accept?  Timing of life insurance app in relation to the captive Only after the captive has a 2 year or minimum 1 year life span Before the captive is set up possibly by the same brokers who are selling the life policy – risk of IRS attention to marketing practices and client dissatisfaction.  Insurable interest Who is insured and who benefits from the policy proceeds – client company policy and practices  Business or personal insurance equivalence Estate planning, key person insurance or ‘personal insurance when the same person is majority owner of operating company and captive – client company philosophy and practice. Captive Insurance Company When captives dance with life insurance 14

15 See Appendix for instructions on how to change sidebar photo  Does the client company accept life insurance marketing that involves captive insurance companies? What are the client company guidelines for participation and financial guidelines? Conceptually it makes sense for the captive to be established with a track record for a year or two before a life insurance application is taken. A broker taking a life insurance application before the captive is established particularly if there is a fee for set up and administration of the captive red flags of marketing and purpose of the life insurance in the context of the tax advantages of the captive set up Does this meet the direct company guidelines for participation, insurable interest, or financial criteria? Captive Insurance Company and Life Insurance A Reinsurance Perspective 15

To change photo: 1.Delete the current image. This will leave a blank placeholder with a picture icon. 2.Click the icon to add a new image. The photo will be automatically be cropped to fit the placeholder. NOTE: If you use the “Change Picture” function, the image will be imported in its original proportions and won’t fill the placeholder completely and will need to be cropped. 16 Foreign Risk Financial Underwriting

17 See Appendix for instructions on how to change sidebar photo Is it Legal?  Some countries may have restrictions about buying life insurance.  What is the applicant’s relationship with the United States?  Must be in the United States to complete the requirements and have the policy delivered.  Where are the assets located? Don’t forget the currency conversion. Verify with your legal department first

18 See Appendix for instructions on how to change sidebar photo What documents will help?  Documents supporting United States assets, including a breakdown of assets and liabilities in the United States and the other country  Financial justification of the total line  Complete listing of in force coverage both in the United States and other countries.  Where is the premium coming from? A cover letter from the producer may be helpful.

19 See Appendix for instructions on how to change sidebar photo United States Citizens  Where do they reside?  Where do they travel?  How long is each trip?  Purpose of the trip

20 See Appendix for instructions on how to change sidebar photo Company Concerns  Global companies may have limited retention, if the applicant has in force coverage in another company.  Verify the source of the premiums  Sometimes a cover letter is needed to explain the situation.  Anti-money laundering monitoring is a key issue-caution when proposed insured has business ties to a high-risk country.  Politically exposed persons should be reviewed carefully.

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