On-Demand: Wealth Management Webinar Series | Part I

I'm going to get into some contractual differences between various insurance programs. We'll talk about ownership and structure a bit, premium financing, which is a hot topic, particularly over the last five years. How do you distinguish between one life insurance company and another? And how do you integrate life insurance as a part of the planning? The title said, Beyond the Death Benefit, and that's really the focus of the webinar today, is I think there's a lot of misconceptions that life insurance is only a vehicle or an insurance contract that focuses on when people pass away. I'm going to speak about and focus more on the living benefits of life insurance. And quite frankly, just with the pure presence of having life insurance, how it can enhance your overall financial estate and business planning. I'll do my best to get through the content and answer some questions at the end.

But if not, I promise I will follow up after this webinar. So let's get started. I like to start with this chart for a reason. We all go through two phases within our financial life. One being the accumulation phase, where we're earning an income, generating cash flow and accumulating assets and building a net worth. Then we have the distribution phase. At some point in the future, you'll need to convert. We'll need to convert that balance sheet in net worth to produce cash flow for the rest of your life. Now, the challenge is that there's eroding factors and there's headwinds that we might encounter that can affect how steep that climb may be, how flat it might end up being. And you can see there's five different categories. Some of which we're experiencing today. Things like inflation. Taxes are always an issue, market volatility, which we're also experiencing.

If somebody gets sick or hurt, which does tie into part of the content today. And obviously if someone dies prematurely or maybe even lives too long. So we want to look at the context of life insurance and how it may impact both the accumulation phase of our life, as well as the distribution phase of our life. So let's touch on different types of policies that are in the industry. Most of which are differentiated between the type of risk that someone wants to take on with the type of insurance they acquire. And I will say the key contractual differences that revolve around the premiums, the death benefits, and if it is a product that does accumulate cash value, how does that cash value behave? What are the underlying factors that are going to impact the accumulation of the cash value?

I think it's really important just to note here that everybody should first and foremost be aware, if they have life insurance, to be a hundred percent certain what they own. Having done this for as long as I have and for as many clients and people that I meet with on a daily basis, a lot of people have life insurance and they may think it's one type of contract, but it's not. It may be something else. Which may end up being totally different in the type of results that they're going to have in the future. So starting off with the most basic form, which is term life insurance, it's very one dimensional. Term insurance premiums typically are the lowest in the form of cash outlay or premium commitment. The coverage is only going to be for a specific period of time. Could be five years, 10 years, 20 years, there are a few insurance companies left that may actually contractually guarantee a premium and death benefit for 30 years.

There's been some studies done over the last 50 years and the overwhelming majority, upwards of 95% are higher of the term life insurance policies issued in America, they never pay a death benefit. Most people will either outlive those term periods that I just described. They may intentionally drop the coverage because maybe change in circumstances. They may not need as much coverage, or they might start with term life insurance and convert it, recharacterize that term policy into a permanent policy, which I'll get into in a moment. Whole life insurance. Whole life insurance has a guaranteed premium, a guaranteed death benefit and a guaranteed cash value. You'll actually have an asset on your balance sheet that is growing. So this is the first introduction to a living benefit within an insurance policy. You do not have to pass away to have some benefits available to you while you're alive. Depending on the type of life insurance company you acquire whole life insurance from, typically most people acquire whole life insurance from mutual insurance companies.

The mutual insurance companies do not have shareholders. There's no stockholders and most of them have a history of paying dividends. And because it's a mutual insurance companies, those dividends are redistributed to its policy owners. That does a few things for the policy owner. It enhances the accumulation of cash value within the policy on a tax deferred basis. It can also enhance and increase the death benefit over time. And you may have heard or seen where dividends can be used to actually pay the premium. The dividends may be large enough where you do not have to take premium out of your pocket. The policy can support itself and carry that death benefit for the rest of your life without any more outlay from your own pocket. The policy will basically fund the premium. Universal life insurance. The first two types of life insurance I just spoke about have been around for almost 200 years.

Universal life insurance has been around for about 35 years. It actually was created in the highest inflationary environment that this country has ever seen. I mean, inflation, there's a lot of inflation fears at the moment, but when universal life was created, it was in the late seventies, early eighties, where 30 year mortgage rates were 18% and one year T-bills were crediting 8%, 10%. So there was a life insurance that created somewhat of a hybrid product with a flexible premium. So the death benefit is guaranteed and some of these policies actually would give you a guaranteed cash value. Where they would not guarantee the premium, they noted as a flexible premium, some policies may describe that as a planned premium or a projected premium and over time that premium could adjust. So when interest rates were really high and most of these policies were accrediting, the cash value based on short term yields like T-bills, short term, commercial paper, et cetera.

When interest rates declined, particularly over the last 10 years where we've been in a very low interest rate environment, people would start getting notices in the mail. Because the interest rates were so low and the cost of insurance was still rising, they had to make some hard decisions. Do they increase their premium outlay to maintain the life insurance? Do they decrease the death benefit or do they start using the cash value within the policy to fund those premiums? In most cases, people don't like any of the three choices. However, they may not have a choice in this matter. As a result of those events occurring because of the interest rate sensitivity, many insurance companies introduce universal life insurance with no lapse guarantees. So for an additional cost, you would not have that risk of your premium increasing in the future.

So you can have a guaranteed death benefit and guaranteed premium for the rest of your life. Then more recently, I'm going to say in the last decade, equity-indexed universal life insurance was introduced. I'm going to say out of all the life insurance policies and types, contractually that I'm going to touch on, there's seven here, in my observations and working day to day as a practitioner, I would say, this is the type of contract that is most misunderstood. It is a very complex vehicle. It has a lot of moving parts. It is a universal life product that in many respects will track a certain index. Most of them started by tracking the S&P 500. So your cash value was somewhat connected to an index and there's new forms coming out today. There may be a floor in regards to the cash value crediting rate each year. And many of these policies have a cap as well. And your premium is also flexible.

However, for the last 10 years, I would say up until a year ago, it was probably the perfect market conditions. Interest rates were low. The stock market did very well. And now we're experiencing where stock market and many equity backed indexes are in the negatives. People are experiencing maybe changes within these products. Those floors and caps can change. So this is a product that you really do need to understand and read the fine print. There's a lot of details. Those so-called illustrations are illustrations. They're not guarantees, they're mostly projections and a lot of fine detail to understand what can change over time. And this particular product has probably the most different contractual elements that really need to be understood.

Variable universal life has been around for about 25 years. Very similar to just the universal life with flexible premium. The difference here in this program is that the underlying cash value will perform based on underlying open ended, typically mutual funds. So you actually could buy an insurance vehicle where you're actually creating an asset allocation amongst a variety of different underlying funds, mostly retail type funds. So there is no guarantees in terms of the cash value. You still have that premium risk where the premium can be higher or lower in most cases, unless there is a no-lapse guarantee rider built into the policy.

And it gives you the opportunity for upside as well as accepting some risk on the downside as well. Private placement life insurance has been hitting the press a lot over the last couple years. It's technically a variable life insurance policy, but it's distinguished by a few different elements. Private placement life insurance can only be purchased by accredited investors. So you have to have a certain net worth, a certain income level to qualify for the coverage. There's only a handful of insurance companies in the U.S., and there's a few offshore as well that provide this product. The underlying cash value is where the big difference is contractually. So instead of choosing an asset allocation amongst institutional retail mutual funds, here you have the opportunity where your cash value will track hedge funds in different alternative investments. Some of which may be less liquid and many of the high net worth individuals that we work with may look at this vehicle as a part of their overall asset allocation.

Typically the minimums for private placement life insurance in terms of premium requirements, they can range anywhere between 500,000 to a million dollars a year, and typically are funded a minimum of three to four years. So it's anywhere between a two to four million dollar commitment level. That's kind of the barrier of entry for private placement life insurance. How do you compare carriers? There's a lot of ways to compare carriers. There's some simple and more technical ways. I'll start with the simple, there are several rating agencies. The three biggest are Standard & Poor's, Moody's Investor Services and Best Review. They all are voluntary. So insurance companies are not required to be rated by the agencies. They're actually paying the agencies. There's two other rating agencies like Fitch rating services and Weiss Research, which are maybe less known, but also look at these companies and their balance sheets, the risk they're taking on, the type of insurance programs that are supporting its cash flow revenue, et cetera.

And I think it's important for everyone to know how their insurance company is rated or when they're considering acquiring life insurance is to look at all the rating agencies. As an advisor it's our responsibility as we do due diligence, we subscribe to the rating agencies and reporting companies that update this monthly. And there are some companies that are not rated by any of the rating agencies, or maybe just Best Review. And I would just say, as a rule of thumb, it's good to have at least three rating agencies at a minimum, rating the insurance company. Because most of these insurance vehicles that people are acquiring or businesses are acquiring, you may hold onto that contract for 10, 20, 30, 40 years. So you would definitely want to distinguish each insurance company contractually as well as how strong are they financially and their balance sheet.

Then also look at company history. What has been the history of paying dividends for whole life insurance, as an example. What has been the history of changing the caps and the floors on equity index universal life insurance? What has been the history when we're going through difficult times? So over the last few years, it's been, I think, a big test as we went through COVID where many insurance companies basically shut down. They were not writing any new insurance or if they were, it was on a limited basis, excluding people over a certain age or certain health history requirements. Where other companies were actually very liberal and it really separated certain insurance companies versus the others in terms of the ease of doing business, even if you were an existing policy owner and wanted to make changes to an existing policy.

Some industry updates. Policy types and designs are absolutely impacted by the regulatory changes. We've had a few just in the last few years and there's some that we're in the middle of, and they're ongoing. Everyone should know that most regulatory changes really are at the state level. That's where most insurance legislation and governance is occurring. So some insurance companies may not be doing business at all, as an example, in New York state, but might be doing business in other states as well. So you really have to look at the state to see what insurance companies are issuing coverage in each state.

Section 7702 passed at the end of 2020, went into effect in 2021. Essentially this was impacted by the prolonged low interest rate environment. Certain life insurance products, starting with whole life, had minimum contractual cash value guarantees. As a result of 7702, it basically allowed insurance companies to reduce the contractual guarantees on their whole life insurance cash value. There's some pros and cons as a result of that. As a result of the guaranteed cash value being reduced, in some respects the premium went up. But I would say for the companies that are in this space, the overall cash value and internal rate of return may have improved. So there's less reliance on the contractually guaranteed cash value and more dependency and focus on the non-guaranteed elements of the cash value. So when looking at a product two years ago versus today, you can see that there's some differences and you can see the description and the illustrations is a little bit different as well, which probably requires some translation and guidance as always.

It also impacted the amount of premium that can go into these life insurance policies to still meet the definition of life insurance. Life insurance in many respects is used as another asset class. And there's some folks that may want to accumulate cash value or businesses may want to accumulate cash value because of the tax preferential treatment of the cash value. That is one other advantage of 7702. So I think in general, it has given us more flexibility in terms of the design of the insurance vehicle, based on the goals and objectives. Qualification and taxation of private placement life insurance. One thing you want to avoid as I described before, there are life insurance contracts that are funded to accumulate cash value on a tax deferred basis. A modified endowment contract is basically the ceiling in regards to how much cash value, how much premium you can put in relative to the death benefit.

And if you cross the line, which all these insurance companies, illustrations and systems are regulated and monitored, you would be notified if it becomes a modified endowment contract. Most people want to avoid their life insurance becoming a modified endowment contract, because if it is a modified endowment contract, it is a taxable event if you're taking out any withdrawals or loans from the cash value from that life insurance. Most people want to have the flexibility of taking withdrawals or loans on a tax free basis. So just beware in terms of, if you have an existing contract, it could potentially become a modified endowment contract, or if you're funding a brand new vehicle, the systems and the advisor could position it in such a way and design it so it avoids becoming a modified endowment contract. Most private placement life insurance, 10 years ago or longer, was written offshore.

Some for tax reasons and in some cases really just because some of the insurance companies that were writing these contracts, there are different regulatory requirements that were more liberal. Most of the major insurance companies that are in this space are onshore, which I can tell you just from a reporting standpoint, like FBAR and different reporting requirements have made it easier, and the vehicles are similar, whether it be offshore versus onshore. I mentioned before that there's regulations and rules in terms of who qualifies for private placement. There's also rules in regards to having no direct or indirect control of the underlying investments. So if you happen to be an investment advisor, you cannot be the money manager with the underlying investments within a private placement life insurance contract. They have to be separate, what they refer to as dedicated insurance funds from third parties. Another few rules that have been passed, starting in 2015, is actuarial AG49, AG49a and AG49b, which is in progress as we speak. That acronym is for actuarial guidelines which are issued by the National Association of Insurance Commissioners.

So it's really all the insurance commissioners of all the states in the United States that get together and look at input from insurance companies, from consumers, as well as independent advisors like myself, to make sure that they're protecting the consumer. These all revolve around equity index universal life, where there's been a lot of activity because it's a fairly new product compared to some of the others that were mentioned earlier. And as a result, there's been a lot more scrutiny, a lot more regulatory requirements and disclosure requirements when you're looking at an enforced illustration for an existing policy, as well as if you're looking to acquire an equity index universal life policy. And they've just made it that much more difficult in regards to making sure that expectations are somewhat met and individuals before making investment decisions and maybe dedicating very large amounts of money, know and understand the differences between those contracts.

You may have also seen or heard about a lot of merger and acquisition activity in the insurance industry, which relative to other industries, insurance industry historically has been a little bit more quiet, a little more stodgy. However, in the last five years, some of it influenced by section 7702, AG49a. I would even say with COVID over the last few years. Low interest rate environment, combination of these, could be some or all of these combined. Private equity firms are now acquiring insurance companies. There's been a lot more mergers scale and size. Isn't the reason to choose an insurance company, however, scale and size can mean something in regards to the ability to offer various products, to weather the storms of low interest rate environments or volatility in the stock market or events like COVID, which we really haven't experienced in a hundred years.

So a lot of stress testing has been done over the last three years, which have made insurance companies and executives of those companies look at their existing business and ongoing forward basis, what is the best opportunity and strategy going forward, policy selection and design in selected financial estate planning scenarios. So just to walk you through types of life insurance, the insurance companies, I always start, and I think suitability and the profile of the client's facts and goals and objectives is paramount. No different than choosing any other type of investment. There's an appropriate insurance product and vehicle for the goals and objectives and facts and circumstances of that family or the business. Some criteria such as premium, guarantees of premium. Do you want flexibility? The level of premium. What can your cash flow and budget support on a realistic basis, particularly if it's a permanent insurance product? Do you want to have cash value accumulation?

What kind of flexibility do you want to have in terms of the underlying cash value? Do you want to take on risk? Do you want have guarantees? Do you want to have a combination of the two and have flexibility going forward? Death benefit and time horizon. And I actually should have put a line between the two let's start off with the death benefit. Having been in this industry for 35 years, I am actually delivering a lot of death benefits. And I will tell you the first question, if the spouse or business partner was not involved in the acquisition of the insurance, no one asks, "Was it term or whole life or universal life?" The only question they ask is how much? So you want to make sure that you have the appropriate amount of death benefit and there's ways to approach that. I would say there's two most common approaches.

One being human life value, no different than if you were ensuring a million dollar house, if it was going to burn to the ground, there are calculations typically based on your age and your income or net worth that advisors have their standards out there to determine what that person, that individual's human life value is. Also the time horizon. Is it a short term need? Is it one year, five years? Is it to ensure short term debt or liability if you're in business or acquired a home or have young children? Or is it a long term horizon, something permanent in nature that will also differentiate the approach here as well.

Life insurance for survivor income. It's not unusual that many clients, their needs are going to change over time, right? And that's why it's always encouraged to look at this at least once a year. The life insurance that you acquired five years ago may not be the appropriate amount, the type, or maybe even the structure. And when I mean structure, the ownership of the life insurance. So it's good to look at that at least once a year. Cash flow, can you sustain and afford the premium? Do you have the opportunity to maybe increase your commitment to the premium? You might have started with term insurance and may be a candidate for something permanent in nature. The permanency of the death benefit, some of the other living benefits I'm going to touch on in a moment, another asset class that's growing on a tax favorable basis. Pension maximization. When we're doing financial plans, many folks that might have a defined benefit plan at retirement have to make a decision.

Do they take a straight life annuity? Meaning if they retire, they're going to have a certain guaranteed income for the rest of their life. But if they have a spouse, if they were to die, their spouse gets zero. Most people do not take that option and it is required under law in most states that the spouse has to sign off. And that has to be notarized where they would get zero paid to them in the event of the pension benefit person receiving benefits. But this is an opportunity to look at the difference in what the cost actually is to have survivor benefits. So to guarantee a survivor income for the rest of his or her life, the person receiving the pension has to take a reduced amount. This is an opportunity with life insurance planning, integrating it with your overall financial planning, where you might be able to, depends on age health, the amounts of the pension, where you might be able to take a higher benefit while you're alive, but maybe fill in some gaps for survivor benefits.

Because typically there's three, four or five different levels of survivor benefits that are offered. Life insurance as an investment or an asset class. So depending on the goals, objectives, risk tolerance, and level of premium committed, there are policies that could be designed. I'm going to break them into three categories. I'll say the more retail off the shelf, permanent life insurance, whether it be whole life, variable life or universal life of some form, you can design it in such a way to accumulate cash value. Having living benefits, where you can actually take money out tax free, which I'll describe in a moment. If there's a higher level of commitment based on your net worth and income, it's all relative. There are institutional life insurance offerings that typically require at least 50,000 of annual premium. Some cases a hundred thousand, whereas an example, if you put in a hundred thousand dollars in these institutional programs, you'll see in the first year, the cash surrender value could be $95,000.

So there's a reduction in expenses built in, or those expenses are built or spread out over a long period of time, which gives you much more instant liquidity in that type of policy design. And then the third being private placement, as I described before, where the commitment level would be 500,000 or maybe even a million dollars a year for four years. And in that case, the pricing is very similar to having an investment vehicle. So it's typically a percentage of the assets in the life insurance contract, plus some form of mortality costs and expenses, which are very transparent and could be noted in advance of the purchase. You should also think about in advance, what is the exit strategy? This ties back to time horizon. Is it a vehicle that is a backup plan or is it a vehicle that there is absolutely an intention of using it to supplement retirement for a family or for in the business context for some type of executive retirement plan?

All of these are considerations when designing or choosing a contract. Life insurance for a state liquidity. So today the exemption is pretty high. It's 24 million dollars, almost 25 million dollars where you can pass, if it's a husband and wife, to the next generation without any federal estate taxes. If someone's net worth is greater than that life insurance is typically a good vehicle because it provides instant liquidity. It could be designed in such a way that the life insurance would not be includeable in the insured's estate, but can be put into an irrevocable life insurance trust, which the actual death benefit proceeds would be outside the estate. That could be a very effective tool, particularly for clients that are illiquid in terms of their balance sheet make up. If they have closely held business interests, if they own a lot of real estate, they may be an alternative investments that are less liquid and valuations may fluctuate on a less frequent basis.

So life insurance could be an effective vehicle there as well. Split dollar is basically an arrangement between the insured and the owner and the owner could be a business. It could be a trust, could be a third party. I would tell you that since 2003, that's when the rules, there were some dramatic changes and there was some grandfathering for any split dollar arrangements prior to 2003 and a whole new set of rules. That's a webinar in itself. But if you ever are part of a split dollar arrangement, you just want to make sure that you're following the rules. You don't want to lose the grandfathering, in most respects. You want to make sure that your documents in place. There actually has to be a legal document, which is a Split Dollar Agreement and consider the exit strategies. Life insurance has also used to compliment certain estate planning and charitable giving strategies.

When somebody is charitably inclined and is maybe also looking to reduce income taxes, one type of vehicle, just as an example, is a charitable remainder trust. Where if someone has, a family has maybe highly appreciated assets with low cost basis, there's methods to benefit a charity, get income tax deductions, but you're giving up a lot of those assets that would normally have gone to family. The use of life insurance complimenting that type of strategy with a charitable remainder trust is typically a good vehicle to consider when looking at what the overall objectives are. I'm going to start moving a little quicker just based on the amount of content we have left. So death benefits for life insurance under section 101(a) are generally income tax free. Cash value is tax deferred.

What's unique about the taxation of the cash value, it is tax deferred, but it's first in, first out accounting. So you can withdraw all of your basis, even if there's gains in the life insurance without any type of taxable event. Most people that want to get to more of the cash value in excess of basis. Most life insurance companies have a contractual guarantee, could be a variable rate, could be a fixed rate. Some give you the choice between the two. Those are also some of the weeds we get into when evaluating the different types of choices to access the cash value. But that would be a method of getting to more cash value and liquidity while you're alive without paying any income taxes at all.

And I just want to know that if someone ever wants to surrender a policy and they've already extracted either through withdrawals and/or a combination of loans, if there is a gain and you surrender the policy, sometimes people get caught into that trap where they didn't realize that they would have a taxable event at that point in time. So just, I would say be careful before you surrender a policy and just make sure you understand what the cost basis is and what the taxable impact is. A few areas where life insurance is used for business planning, I would say the most commonly used is the Fund Buy Sell Agreement. So when you have more than one owner. So using an example where you have owner A and owner B, neither one of them wants spouse or family to get involved in the business. Nobody's involved in the business.

And in the event, a business owner dies, life insurance would be used to make sure the estate of the decedent or spouse or family is made whole. So they're making a commitment to one another in a legal document stating that upon death, there would be a forced buyout. And it would be based on some form of valuation method where life insurance would be paid to the decedent in estate. And an exchange for that, the surviving business owner would end up owning a hundred percent of the business. Very commonly used. Key person life insurance is really to protect the business. This could be the owners insured, or it could be a non-owner that's a key person within a business, insured. So using an example, we have a client that has a national sales manager. He has a minority interest in the business. The only time that minority owner would have a liquidity event is if they sell the company in the future. However, if that person dies prematurely, it would be big shoes to fill.

Because the founders of the business are really not involved day to day in the marketing and sales process and are one step removed with the relationships with all the sales people around the country. So it's not uncommon that they put key person life insurance, where the owner, the payer and the beneficiary would be the business. Executive benefit planning. Many people are involved in qualified retirement plans, 401(k)s, profit sharing, very few businesses have defined benefit plans as a percentage of the whole, but there might be a select few key people that you want to make sure that you're attracting, you're rewarding their performance, and you're retaining them on a tax favorable basis. We have limitations because of all the testing rules under section 401(a), 401(k), et cetera. So there are different types of golden handcuff type plans that are generally funded by some form of insurance vehicle based on the tax preferential treatment that I described in the previous slide, having an income tax-free death benefit, if that person's insured and the tax deferred tax, favorable treatment of withdrawals and loans of the cash value within the life insurance.

This is again a very common business strategy with Fortune 500 companies. But I will tell you, it even is commonly used and could be considered based on some goals and objectives for a select few people within an organization. Contractual terms explained, I'm not going to go through all of these. I just want to highlight a few where there's been some innovations in the industry. So starting off with second page long-term care rider. So there's a lot of folks who want to get long-term care insurance, but either A, can't afford buying life insurance and long-term care. There are many life insurance companies for a small, additional premium where you can access anywhere between 90% or even as much as a hundred percent of the death benefit to defray costs for home healthcare, assisted living or even nursing home. If you're acquiring any type of term or a whole life insurance or universal life insurance, many insurance companies are offering these.

Prepaid interest account. I think this is something else that people are taking advantage of to make their monies work harder. There are some individuals that may want to prefund their life insurance. And some insurance companies will ask if you want to fund them in advance, they can credit you three, four, four and a half percent. So some of the rising interest rates that we're seeing right now, actually there's some favorable effects with prepaid premiums into their life insurance. Premium financing strategies. What is it? Why is it so popular? So over the last 10 years, it was probably the perfect environment for premium financing. No different than financing anything else in a business, or you personally. It's making a conscious decision of holding onto your assets, investing them differently, or the cash flow through your earnings. Rather than funding, the insurance premium is going to a bank or third party where you're just financing that premium. You may be paying interest only, or maybe just some premium plus interest, et cetera.

So over the last 10 years it was a perfect environment because interest rates were so low and you had insurance vehicles, there was arbitrage between what you're paying in interest versus what you're being credited in interest, whether it be whole life or some type of variable life or some type of equity index universal life. I will tell you that this has had a pretty big shift in the last six to 12 months as interest rates have been rising and as market conditions with particularly on the equity side, if it's tied to any index and cash values declining that there's risk. And there's a lot of moving parts here. So who is the target market for this? There may be an individual or a business that wants to acquire a lot of permanent life insurance. However, they just may not want to make that commitment right now.

Maybe there'll be a liquidity event in three to five years and cash flow might have a different... There may be a different circumstance and they want to lock in premiums at a earlier age. Or there may be a family that may have used their lifetime gift exemptions. So there might be some gifting capacity issues. So there are facts and circumstances that are going to drive this decision. I will just tell you that due diligence factors for evaluating these programs are critical because there could be a lot of risk involved. It's not just choosing the appropriate insurance vehicle. It's not just choosing the banking terms. And when we talk about banking terms, it could be variable interest rates. It could be fixed interest rates, some banks and third party lenders require collateral. Sometimes they'll require collateral and it has to be deposited in that investment institution or bank. So there are differences in regards to the type of collateral. Some will accept collateral of credit.

I'm going to say one major factor with many of our clients is whether they're going to have a personal guarantee attributed to this lending arrangement. So I would just say that looking at the underlying vehicle, the lending arrangement and the terms, and working with an advisor that actually understands premium financing, there's a lot of different modeling that could be done so that you understand the risks with rising interest rates or declining cash value within a product and the requirements of maybe posting more capital. You want to just know that you're getting into a transaction, that you understand the risks, as well as the rewards and ultimately the potential tax issues. There are cases we have seen where the loans were paid off to the third party, using the cash value of the life insurance. And if you recall, in my previous slides, if there's a loan outstanding in the life insurance and someone surrenders the contract, you may have tax implication there, which would be at ordinary income tax levels. So I would just say be buyer beware.

Just to wrap up in the remaining few slides. We put this slide together in about, I think the year 2002. And we talk about cash value. We talk about permanent life insurance. We look at this as two different asset classes amongst all the other asset classes on the left, and whether you're in the accumulation stage or whether you're in that distribution stage. Having more options in terms of where you're accumulating and where you're taking distributions from at any given point in your life, we want maximum flexibility. So just using the financial crisis, as an example, from the year 2007 to about 2010, I probably had more clients either take withdrawals or loans from their life insurance in those three years, more so than the 20, 25 years prior combined. And it was a lot of reasons. The stock market was down a few years in a row, and nobody wanted to sell any positions in a down market, but there was also a big credit crunch.

So access to capital and cash was very important to our business owners. So looking at cash value in permanent life insurance is always looked at from a balance sheet allocation perspective. What I'm sharing with you in the remaining two slides is really the process life insurance by itself. You may not get the most value, but when looking at it in an overall comprehensive planning process, this is proprietary to EisnerAmper. We will take clients through understanding their facts, goals, and objectives, and really having a blueprint laid out. It's in step 4A when we really drill deep in understanding, what is the life insurance purpose? What is the appropriate amount? What is the appropriate type? Should it be owned personally? Should it be owned by a trust?

And I think by going through and looking at this property or asset, no different than choosing an investment vehicle or how you're financing any other type of asset, is critical. And that's where we've seen, I think, the overall best results. And on a going forward basis with clients, as we meet with them on an annual basis, the protection and estate solution review, that upper right quadrant, is where we're reassessing. Because again, as your balance sheet grows, as your family life changes as your business may grow, if you have an operating entity, I would just encourage everybody, if you have anything other than term life insurance, is to request an Annual Enforce Report. That is an illustration that shows you what is going on in life insurance.

It's not an annual statement that's taking a snapshot, but it's looking at that life insurance and projecting it from today on a going forward basis so you understand and that there's no surprises in regards to the premiums, if they weren't guaranteed, the impact of some of those contractual differences that I covered. And with that, I am going to close and pass it on to Astrid.

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